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You’ve done the work, sold the product or delivered the service, but what happens when you are paid late? It’s generally accepted that cash flow is the lifeblood of any new business. That’s what makes late payments and habitual late payees all the more frustrating to deal with.
In fact, research last year by the Federation of Small Businesses showed that small businesses are owed on average £6,142, mostly by larger firms and if all payments were made on time 50,000 more businesses could be kept open each year.
Many businesses offer credit terms to their customers. But any delays in getting paid can have a serious impact on the health and even viability of your business. If you understand more about the reasons why payments are often late, then you can adopt some effective strategies to help stamp out unnecessary late payments.
Recent research by Bottomline into the thorny area of late payments shows that 92% of financial decision makers admit to having paid suppliers late. Sadly, it is not a new trend.
If we go back a bit further we see that in 2017, a slow payer ethic emerged as the biggest challenge to getting paid on time. In 2018, the research revealed that a surprising number of financial decision makers were actively delaying payments as part of their cash management strategy.
In 2019, late payment is still all too common. What has become clear is that companies are often taking a conscious decision to pay suppliers late. Government intervention, such as the Prompt Payment Code of 2008 and the Duty to Report (DTR) regulation introduced in 2017, requiring businesses to report on payment practices, is doing little to curb this unfair business practice.
The research uncovered some interesting facts about what is behind late payments. You might think that it varies from company to company but some common internal and external factors leapt out:
Just over a third of financial decision makers (35%) are actively using late payment to protect their own liquidity and cash flow.
Blame is often put onto suppliers with 39% citing poor quality service or incorrect invoice details (33%) as reasons for late payment.
Additionally, 40% of financial decision makers admit their business has inefficient Accounts Payable processes that limit their ability to pay on time.
However, 17% of cases of late payment occurred because the supplier didn’t chase the invoice.
If the Government legislation and initiatives are not helping, what practical steps can businesses take to address a problem that appears widespread? It is not easy but there are some solutions and techniques that businesses can adopt that can make a real difference.
The easiest one to implement is to make sure that you have followed all of the customer requirements for invoicing, such as quoting a Purchase Order number if this is mandatory and make sure you send it to the right email/postal address.
Some organisations have been known to query individual line items as a way of slowing down payment of an invoice. You can overcome this by sending separate invoices if multiple products or services are involved. That way, a query with one aspect of the invoice shouldn’t hold up the settlement of the remainder.
Did you fully appreciate the last stat quoted above from the research? It’s worth repeating here. The reason behind one in every six late payments is that the supplier didn’t chase up payment of the invoice!
Busy business owners always need to find the time to chase invoices. If you can’t find the time or don’t like the potential for the confrontation that comes with chasing a late payment then pay someone else to do it for you. Or introduce an automated payment method such as Direct Debits for those customers who have any recurring payments with you.
Alternatively, you can separate yourself from the tricky conversations with that annoying customer by creating a separate email ID and use that to chase up late payees without jeopardising the customer relationship.
Be efficient with when and how you are going to chase for payment. Use automated email reminders and communicate with your customer before an invoice becomes late.
Cloud-based solutions for distributing and tracking invoices electronically give you vital visibility over each invoice status in real-time. If you can see an email with your invoice hasn’t been opened, then take proactive action by sending a reminder email, or for utmost proactivity, you can call the customer to make sure that they have received the invoice and are ready to act on it before it becomes overdue.
Automated email reminders will improve the likelihood of getting paid. This starts to address that 17% of cases where an invoice isn’t chased. Sometimes, a reminder puts you and your invoice at the forefront of the minds of the Accounts Payable staff.
It might surprise you to know that you can claim interest and debt recovery costs if another business is late paying for goods or services. The interest you can charge is called ‘statutory interest’ - this is 8% plus the Bank of England base rate for business to business transactions.
You can also charge a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it. The amount you’re allowed to charge depends on the amount of debt and you can only charge the business once for each payment.
To put this into the terms and conditions of sale or contracts that you hold with customers. In practice, you might never need to use it, but just knowing that your customer has signed up to a contract with a late payment penalty, may be a suitable deterrent to deliberate late payment.
Many small businesses are reluctant to enforce this as it can damage the commercial relationship with a valuable customer. However, if you value your cash flow and you are repeatedly not getting paid on time, then this might a last resort tactic to try.
Obtaining payment at the point of sale is the best way to avoid late payments. But if your business is based on offering credit terms to customers, then it is very likely that you will have some element of late payment at some stage.
Offering online payment options can be really effective when chasing for payment. If you can provide a link where the invoice can be paid immediately by credit or debit card, then this gives the payee no reason not to clear an overdue invoice. Again, if it’s a recurring payment, get the customer to sign up to a Direct Debit which can also be set-up online…and then once set-up, you save time on chasing.
Accounts Payable or Credit Control teams that have used this technique usually confirm how effective it can be to put someone on the spot with a request for immediate payment.
What about your own payments? Accounts Payable automation solutions make it easier to process and approve your own invoices more quickly. Efficient and timely invoice approval creates opportunities for businesses to partner with finance providers to put in place early payment programs.
Such collaboration means that you avoid paying out hard-earned cash too early and minimise the likelihood you will need to use overdraft facilities, while at the same time, helping your suppliers to improve their inbound cash flow and get paid more quickly.
Developing strong commercial supplier relationships can be a win-win. Previous Bottomline research into payments has seen respondents stating collaborative relationships with customers (2017) and suppliers (2018) as the reason for getting paid on time.
It places good payers in a better position to negotiate contracts with trading partners and create relationships that allow for more accurate cash forecasting on both sides.
Late payment is the bane of many a small business. Many companies experience cash flow problems, are forced to dip into overdraft facilities and impact on profit growth potential.
Whilst we should all aim to build a culture of good payment practice in our organisations by supporting the faster settlement of invoices, by following the approaches outlined above will enable you to start addressing the most common reasons why companies are not paying you on time.
Finally, don’t be afraid to turn business down from habitual late payees. Sometimes it is better to walk away from bad business if it is going to cause you significant problems in getting paid on time. There are some customers it is just not worth having.
If you would like to learn more about the research mentioned in this article, you can download a copy of the Bottomline 2019 Business Payment Barometer report.
Or talk to a member of the team who can go through our solutions that can take the pain out of payments.
One of the most well-loved lines in cinematic history is from the film Jerry Maguire. Picture the scene. Cuba Gooding Jr insists his agent, played by Tom Cruise, repeats the phrase “Show me the money” over and over, at the top of his voice. We are not suggesting you need to do the same for your customers. But here we have some sound financial advice for businesses. After all, until you receive money from a sale then you are at risk of late or non-payment, making it tough for you to manage cash flow.
Ding! That’s the sound of an entrepreneur having a lightbulb moment with a great idea for a business. In a rush to develop a plan, launch to market and accelerate growth, make sure you give sufficient thought to how you are going to fund your brilliant business idea.
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