How to deal with late payments

Late payments can have a huge impact on the cash flow of smaller businesses.

The Federation of Small Businesses found that in every quarter of 2022, the majority of small businesses had to deal with late payments. 

For one in four businesses, late payments got worse quarter-on-quarter. 

According to research from Xero, late payments cost small businesses an estimated £1.6bn in 2023 (PDF, 4.2MB).

It's a perennial problem that not only has an impact on your cash flow but also wastes valuable time as you chase unpaid invoices.

If those late invoices become bad debts, they can leave your business struggling to survive.

In this article we’ll explain ways you can limit the number of late payments by vetting your customers, how to ensure your invoices are correct, and what to do if a customer hasn’t paid your invoice.

Effective credit control

Late payments are a frequent problem for many businesses, but effective credit control can help.

The good news is that effective credit control can help you keep on top of late payments and reduce the likelihood of this happening.

More effective credit control procedures can go some way to alleviating the problem of late payments.
At the very least, you can do the following:

Carry out credit checks

You could run credit checks on businesses before accepting them as new customers.

Review payment terms

Negotiate payment terms that suit your business from the start of a trading relationship. 

For example, you could negotiate to receive 50% cash up front, with the balance to follow upon delivery or once the service is complete. (See the case study below.) 

If a prospective client won't agree to your terms, it may possibly be a red flag. 

Whatever you decide, make sure the terms are clear and documented and get the client to agree in writing or via email.

Analyse debtors

Late payment is very common. 

It can be tempting to give in and accept it as part of life. But don't. 

Review outstanding invoices regularly. 

Highlight the ones that are the furthest overdue, and the ones that are worth the most. 

Make a plan to sort them out.

Automate invoicing and follow up

It should go without saying that your invoice shouldn't contain any errors. 

Furthermore, if you have late-paying clients, you'll become very familiar with following up. 

This can be a time-consuming chore, so you should consider using a software package that can automate invoicing and follow-ups. 

These programs even have collection templates.

Leverage relationships

It's probably a good idea to build a friendly relationship with the person in the finance department who pays your bills. 

Even if they're just an administrator, they may give you some insight into why any payment has been delayed.

Stay cool

Whatever you do, don't telephone debtors in an angry mood and start to threaten them. 

They may also be having issues with late payments. 

Making forceful demands risks alienating the people who owe you money, when you should be persuading them.

Tips for writing invoices

As a small business owner, ensuring the accuracy of your invoices is crucial. 

Often though invoices are submitted with errors or without enough information. 

Incorrect invoices can lead to payment delays or, in some cases, non-payment.

While there may be specific considerations relevant to your particular business when it comes to invoicing, several key points generally apply across the board:

Correctly identify who is paying for your product or service

It's important to identify the correct recipient for your invoice. 

The individual who assigns you the work might not be the one responsible for processing payments. 
In smaller companies, a single person may handle both tasks. 

However, larger organisations often have more complex payment and approval procedures involving multiple personnel.

Be specific on when payment is due

Understanding the timeline for payment is essential. 

Some companies have a policy of paying within 30 days, but this might mean 30 days after the end of the month in which your invoice was submitted. 

To avoid misunderstandings, confirm with your customer the exact date when you can expect the payment to be deposited into your account.

Ensure payment terms match

It sounds obvious but it’s important that the payment amount requested on the invoice accurately matches the amount agreed with the customer before the work commenced.

Ensure you have the correct Purchase Order number

If your invoice requires a purchase order number, request it immediately after completing the work. 

Delays in obtaining this number can result in late submission of the invoice, which will subsequently delay payment.

Submit your invoice as soon as possible after completing the work

Submit your invoice promptly after completing the work, adhering to the contractual terms agreed upon with your customer. 

While it might be tempting to handle all invoices at the end of the month, this practice can lead to cash flow issues as you wait for multiple payments to arrive.

Include all the information in the invoice

It’s a good idea to maintain a straightforward invoice template, but ensure it includes all the necessary details required by the customer to process the payment.

At a minimum, an invoice needs to include the following information:

• invoice date
• invoice number
• payment due date
• bank account details
• payment terms
• payment due date
• the relevant Purchase Order number (if applicable).

Clearly explain the product or service you have provided the customer

Your invoice should clearly detail the completed work and the corresponding payment. 

If a large project has been divided into smaller tasks, be sure to list each individual sub-task separately.

State how the customer can pay

If you accept multiple payment methods, clearly specify the available options, such as via a bank transfer, credit card, Klarna, or PayPal. 

Making the payment process as convenient as possible for your customer could lead to timely payments.

Maintain a good relationship with your customer

It’s a good idea to try and establish a friendly relationship with the person responsible for processing your payment. 

Aim to be the first person they prioritise for payment before the end of the week. 

A week prior to your payment due date, call them to ensure they have all necessary information and that your payment will be processed on time.

What to do if your invoice hasn’t been paid on time

As a small business owner, it is crucial to ensure your invoices are accurate and complete. 

If an invoice includes all necessary information, the due date has passed, and your customer still hasn't paid, it's time to take action. 

Delaying action could be risky, especially if the customer is experiencing financial difficulties. 

If they go bankrupt, you may not be able to recover your payment.

It’s a good idea to consider the following steps:

Check the invoice is correct

To avoid any embarrassment when following up on an invoice, it's a good idea to ensure that all dates and necessary information are accurate and complete on the invoice.

Reach out to your contact at the business

Often, a smaller business will receive work from one person within a customer's business but lack contact details for the appropriate individual to reach out to if payment is delayed. 

Larger firms typically have a Procurement department where someone initially assigns the work. 

The invoice then goes through an Approvals process where it is checked and signed off by the necessary individuals before finally reaching the Accounts Payable team for payment.

The initial contact in the Procurement Team may be unaware of the status of your work and won't know if your payment is overdue. 

Therefore, you may need to contact the Accounts Payable department directly. 

Provide them with all relevant information related to your invoice to help them identify it and determine why payment has not yet been made.

Double check the payment due date

Some businesses state that they will typically pay their outstanding invoices within 30 days, but this often means 30 days after the end of the month in which your invoice was submitted. 

If this wasn’t communicated at the beginning, you might mistakenly believe the payment is overdue while the customer does not. 

It's challenging to determine when a payment is truly overdue without written confirmation and mutual agreement on the exact date the money will reach your account. 

Therefore, it’s essential to establish and agree upon a clear payment timeline that is acceptable to both parties.

Remember that if your payment is overdue, you have the right to charge interest on the outstanding amount.

The Small Business Commissioner has an interest rate calculator that you can use to calculate the amount of interest you can charge for late payments.

Try to maintain the working relationship if possible

Maintaining a good working relationship with customers is important to secure future work, which often leads many businesses to avoid following up on overdue invoices or charging interest. 

However, neglecting to chase up payments can jeopardise your business, and there could be a reasonable explanation for the delay, such as the invoice being lost in the system. 

Most customers are willing to rectify issues once they become aware of them. 

They rely on your goods and services, and may struggle to find another supplier who can meet your quality standards. 

Therefore, it's crucial to address payment delays promptly to protect your business interests.

Consider taking legal action

If, after several attempts, payment is still not received, you could consider taking legal action. 
It's a good idea to seek independent legal advice. 

Options may include negotiating a solution with the help of a mediator, or making a court claim for the money.

Can the Small Business Commissioner help get an invoice paid?

If your business has customers who are late with their payments, you can contact the Small Business Commissioner (SBC) for help with getting the issue resolved.

The SBC:

• considers complaints from small businesses (those with fewer than 50 staff) about payment problems they are encountering with their larger business customers (those with more than 50 employees)
• makes non-binding recommendations on how the parties should resolve their disputes.

It won't get involved if litigation is underway between the parties.

The SBC also has advice on what you can do to get invoices paid on time.

When a person or business owes you money, you have a number of other options. Visit the GOV.UK website for further information.

Chasing late payment from overseas

Chasing late payment from overseas can be an area of concern for businesses that trade internationally.

UK Export Finance has a working capital scheme that allows exporters to get paid upfront.

In addition, if you have issues with a country overseas that you'd like to discuss, the Department of International Trade (DIT) has local trade offices around the UK where you can contact a trade adviser for advice.

With the UK having left the European Union, is it no longer possible to make a European Payment Order or use the European Small Claims procedure to pursue payment you’re owed by a resident or business in an EU state.

Those seeking to recover payment from a person or business residing in the EU should consider seeking legal advice.

You can monitor GOV.UK website, which provides official government help and support, if your business trades with the EU.
 

Case study - Fresh Cut Video

Harry Pill owns and runs Fresh Cut Video, a specialist video production agency based in Oxford. He provides insight from his own experience.