The effective management of incoming payments is one of the defining factors in the level of growth a business can achieve. Without a steady flow of cash into the business, paying for stock, raw materials, employees’ wages and all the other things that make a business tick becomes impossible.
To maintain a healthy level of cash-flow you rely on your customers to pay on time, which unfortunately is something they do not always do. According to the Federation of Small Businesses (FSB), 85 percent of SMEs are affected by the late or non-payment of invoices, with the overall value of payments outstanding to businesses in the UK worth an estimated £34.9million.
To reduce the burden of late payments on growing businesses, it’s essential you put a credit control system in place. But what processes should you implement to provide the level of protection you need?
Check the customer’s credit worthiness
Before extending credit to a new customer, it’s important you check their ability to pay the debt. You can do this in a number of ways:
- Obtain a credit report – You can ask credit agencies like Experian and Creditsafe to provide you with the credit ratings of the customer in question. The credit report will be delivered almost instantly for a small, one-off fee.
- Ask for supplier references – Alternatively, you could ask for references from existing suppliers. However, this method can be flawed as the customer is unlikely to give the details of suppliers it has an unfavourable history with.
- Request a reference from the bank – A surer way of obtaining the information you need is to request a reference from the customer’s bank. You will need to ask for the client’s permission to do this, but most companies that have nothing to hide will be happy to comply.
Set your credit terms
Setting clear, unambiguous payment terms and conditions from the outset is an essential part of any credit control process. Your terms should cover not only the payment period but also a maximum credit limit.
30 days is a common payment period , but just because it is frequently used that doesn’t necessarily make it right for you. The payment period you offer should be based on the industry you operate in and the trading relationship you have with the customer. Generally speaking, you should consider the number of days you offer carefully and try to keep it as low as possible. You should also make it as easy as you can for the customer to pay. This can be done by including card payment links on the invoice or by offering a direct debit option.
Charging interest on late payments is one way to ‘encourage’ customers to make a payment within the agreed period. If you do intend to apply interest to payments that are late, you should set out the terms at this stage. You should also inform the customer if you intend to impose penalties for late payments.
Keep on top of your day-to-day tasks
Little and often is the best advice to maintain a healthy level of cash-flow. Rather than waiting until the end of the week to fill in all those invoices, send off each as you finish the work. This will save you a time-sapping task on the weekend and should result in a faster payment.
No one likes those awkward emails and phone calls to customers to inform them that a payment is overdue, but it’s essential to stay on top of the situation.
You should also keep a clear view of your payment situation. This means knowing:
- When incoming payments are due
- When outgoing payments need to be made
- When your account balance hits a lower limit
Chasing late payments
It’s inevitable that at one time or another you will have to chase a payment. Something along the following lines is the route to follow:
- Send an initial email to inform the customer that the payment is late and re-attach the invoice for their reference.
- If there’s still no payment, send another email, again keeping it polite but reminding the customer that the payment is overdue.
- The next stage is a telephone call. Putting the client on the spot in this way should give you a better idea of their intentions and help you choose what course of action to take next.
- If the customer still hasn’t paid, send a letter of claim explaining that you intend to start court proceedings if the payment is not made.
- Finally, take legal action. Debts under £10,000 can be collected using the small claims track at the county court for a small fee. For debts over this amount, you should consider making a statutory demand for the payment and escalating your action from there.
How can we help?
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