How to prevent late payment from clients
Late payment is a sad fact of life for many small businesses. I'm sure most of us have experienced overdue invoices on more than one occasion. But that doesn't mean you're powerless when it comes to tardy clients.
There are practical and helpful things you can do to avoid any issues in future. Here are some top tips to help you minimise late payment from clients and hopefully keep a healthy cash flow.
Present clear payment terms
As a business owner, you are within your rights to dictate your own payment terms. This means, if it suits you, you can tell all your clients that payments must be made within 30 days from the date you issue the invoice. You can even say that you will start to charge interest on anything that's overdue. The UK government has some pretty good advice about late commercial payments and charging interest, if you're stuck.
So when a client approaches you with a new project, inform them of your payment terms. Make sure you do so in writing. Offer a friendly warning that any late invoices are subject to interest charges and explain exactly what that implies.
Ask for deposits upfront and staged payments
As well as defining payment terms, you should also say that you have a policy where you require a 50% deposit upfront before any work begins. Then, once that deposit has been paid, you can start the work. But you should also make it clear that the remaining balance is paid before the work is handed over. That should keep them in check.
You could even break things down further – for example, if you're designing and building a website, you could get a 50% deposit and 25% more once the design is approved before the 'build' begins. And so on. Just make sure you put all of this in writing and make it clear that this is the only way you work because you're a small business and cash flow is crucial to your survival.
If anyone complains about this policy, then you just shrug your shoulders, humbly thank them for their business and wish them all the best in finding another supplier.
Communicate and communicate some more
Sometimes, clients just forget to pay. There's nothing sinister at play – it's just that they didn't realise the invoice was due. So make sure you have a system in place to start chasing like a demon, several days before the payment deadline. Send a friendly email reminder. If that doesn't work, chase up with a phone call. Even better, get a professional to do the chasing for you. Job done.
Automate the chasing process
To make things even easier, why not set up automated reminder emails when payments become overdue? There are plenty of accounting software services that do this for you. FreeAgent is a great example and something I use for my own business Boomerang. You can set up automated reminder emails and even an automated 'thank you' correspondence once payment has been made.
Make it easy for them to pay
Don't put any obstacles in a client's way. Make it as easy as possible to pay. Make it clear that you accept cheques as well as payment via BACS. Make your bank details extremely clear on all invoices and even offer to speak directly to the client's accountant or finance department.
If you really want to, why not send a printed invoice via post along with a self-addressed envelope? That way, they've got no excuse but to put that cheque in the post.
Do a credit check
If something doesn't smell right or you've got a weird gut feeling about a potential client, take advantage of performing a credit check before you sign on the dotted line. Credit checks are quick and relatively cheap but they're also a great way to seek reassurance and make informed decisions about potential clients.
In addition, you can also go on the Companies House website to carry out some basic checks if you're unsure about the legitimacy of a client.
Offer an incentive for payment
If you absolutely want to ensure quick payment, why not offer a 'prompt-payment discount' – one that is only provided to reliable paying clients. For example, you could offer a 10% discount to clients who pay on time – making it clear in your payment terms that this becomes ineffective once 30 days have passed.
Of course, the discount has to be good enough that clients will want to pay on time. If it's neither here nor there, they won't mind taking the hit if they want to delay payment. The discount also depends on the client and how much work you get out of them. In which case, tweak the discount accordingly.
Get to know the client and how they operate
Sometimes, those late payers just have a unique way of dealing with their accounts. As a supplier, you should get to know the client and understand how they operate in order to get paid on time.
Do they have strict supplier terms? Do you have to get a special PO number before you can invoice them? Is there a 'gatekeeper' who signs off all the invoices and doesn't yet know about you? Make sure you tick all the boxes to be an accredited supplier that gets paid on time.
When the going gets tough...
If you've done everything you can to avoid late payment, and you're still waiting for an invoice to be settled four months later – it's time to consider moving away from that client. But a word of warning: don't tell them you're dismissing them until you've been paid. Keep them sweet, keep chasing and get that invoice paid before you let them go.
If you absolutely have to, hire a debt collection agency to chase the money that is owed to you. But be warned – this will very likely kill your client relationship. So before you take this action, weigh up the value of the debt versus the value of any potential work in future.
It's also worth noting that under the Late Payment of Commercial Debts (Interest) Act, creditors have the statutory right to claim interest on late payments – as you will have warned in your initial payment terms.