Chaser news & blog

How construction businesses can reduce late payments

Written by Amaya Woods | 4 Apr, '23

In addition to the challenges posed by the pandemic-related supply chain issues and economic uncertainty, businesses in the construction sector are facing significant cash flow concerns. Compounding these challenges is the ongoing struggle against late payment or non-payment of invoices.

In the UK alone, construction businesses are owed £30 million in unpaid invoices, and 75% of companies are forced to wait more than a month after their agreed payment terms before payment is finally made. 

Furthermore, 2022 The 2022 late payments report by Chaser highlighted that 30% of all construction businesses spend more than seven hours a week chasing late payments. A staggering 60% of respondents in the construction industry reported that their invoices are typically paid 15 or more days late, and 40% of tradespeople reported a worsening of the late payments crisis over the last five years.

Data from BACS Payment Services reinforces this fact, showing that construction businesses spend 130 hours per year, which works out to an average cost of £1500 per business, chasing down the money they are owed.

At a time when the construction industry continues to struggle with low margins, tight profit windows, and an ongoing skills crisis, this money would be much better spent on job completion, retaining or attracting talent, or reinvested into the business.

Given the scale and complexity of these issues, it should not come as a surprise that 50,000 UK businesses close each year due to late payments. However, there is some light to be found at the end of this tunnel. A range of easy-to-implement strategies and innovative solutions have been developed that help construction businesses get paid faster and more efficiently while improving cash flow and ensuring business owners' financial obligations are met.

Coupled with the fact that the global construction industry is predicted to grow 70% by 2025, the sector has enormous potential to capitalise on this growth. Innovative tools, methods, and software can help construction businesses become more efficient, reduce their costs and get paid faster, so read on to learn more about how to make the most of these developments and ensure your business is ready for a brighter future.

Why do late payments matter for construction businesses?

We've discussed the scale of the late payment crisis facing the construction industry, but before we get into potential solutions, let's take a brief look at the cursing impact that late payments are currently having on construction businesses.

The primary concern is that late payments can potentially put businesses in a precarious financial position. Late payments can lead to cash flow issues and, in some cases, insolvency - regardless of how well-run the company might be.

However, there are also knock-on issues caused by the late payment triggered cash flow issues, including:

  • Inability to cover costs - Costs could include rent, loan repayments, wages, and materials, and, in the worst-case scenarios, the inability to cover costs can lead to companies going out of business.

  • Difficulty in maintaining supplier relationships - Late payments can damage the trust between businesses. Since maintaining positive supplier relationships is critical for tradespeople, this can have profound implications.

  • Slower access to credit facilities - Without a positive cash flow, many financial institutions are unwilling to provide loans or other credit facilities that can cripple business growth.

  • Poor staff morale - The impact of late payments on staffing levels and salaries (or lack thereof) can significantly affect employee morale, ultimately leading to decreased productivity.

  • Inability to attract or retain talent - As mentioned, the global construction industry is currently facing a skills shortage further exacerbated by the cash flow issues caused by late payments. Without the funds required to attract talent and retain existing staff, businesses can suffer from a lack of expert knowledge. Without the right specialist staff, companies may be unable to deliver their projects on time and to spec.

These are just some of the ways that late payments can affect a business's efficiency, but they're all serious issues that should be addressed as soon as possible. With the right processes and an effective strategy for tackling late payments, construction businesses can protect themselves from these potential pitfalls and create a healthier financial future for their company.

So, let's look at what businesses can do to ensure their payments are received on time.

How construction businesses can reduce late payments 

Now that we've laid out the accurate scale of the late payment crisis and its impact on businesses, let's look at what construction companies can do to reduce late payments.

Chaser has helped thousands of companies worldwide to get their invoices paid sooner since 2014, and helps businesses get over $5billion paid each year. Here are some strategies Chaser has seen be successful in tackling late payments for construction businesses:

Set clear payment terms 

Clear payment terms are the foundation of any successful credit control policy and should be plainly, and comprehensibly stated in all your contracts, invoices, and other relevant documents.

Having your payment terms clearly stated and agreed upon before starting work ensures that both you and your customer know the payment deadline, and there can be no confusion as to when payment needs to be made.

If you don't already have clear and concise payment terms in place, the below resources are available to help you. See how you can get invoices paid sooner using the right payment terms for your business.

Additionally, by creating an accounts receivables policy, you can clearly state the rules, responsibilities, and expectations of both you and your customer regarding payment.

Lastly, to help demystify the wording used in contracts and agreements there is a glossary of accounts receivables terms you can refer to here.

Send frequent, effective payment reminders

Polite persistence has repeatedly proven itself as one of the best methods of combatting consistently late payments.

The 2022 late payments report shows that businesses that follow up with 90% or more of their invoices are the most likely to get paid within a week of their invoice due date.

However, just sending reminders isn't enough. The message and tone of your reminders are just as impactful as the frequency with which you send them. The best payment reminders are polite, personalised, easy to understand, and include a link to settle the debt quickly with a single click (for example, via a payment portal or gateway).

Remaining calm and professional is key to ensuring your payment reminder is successful. Each payment reminder you send is an avatar for your business. While the collection of late payments is a dynamic matter, your reminders should demonstrate excellent customer service, even if the customer is delinquent in payment.

To help you create the perfect payment reminder, you can use these overdue invoice reminder templates as the basis for your reminders. They help convey urgency whilst remaining polite and professional. You can also send reminders according to this recommended schedule for when you should send your payment follow ups.

  1. When your invoice is issued - Sending your first reminder at the same time as your invoice is issued will make sure that the payment due date is clearly highlighted ahead of time, making it easier for the customer to make their payment on time.

  2. Seven days before the invoice is due - Reminding customers that the invoice is due soon will give them time to plan their payment and make sure it's made on time.

  3. On the day your invoice is due - Reminding customers again on the day their invoice is due makes sure they know they need to pay immediately.

  4. Three days after the invoice was due - If you haven't received payment by this stage, it's time to chase your customer more actively. Sending a polite reminder at this point will get the ball rolling on payment.

  5. Seven days after the invoice was due - By now, payment should have been made, so if you haven't received any money yet, you need to start taking more forceful action. Send another reminder and provide clear instructions for how to pay you, reminding them that the payment is now overdue.

  6. Follow up via phone and email 2 weeks after the invoice is overdue - If two weeks have passed and you still haven't been paid, it's time to make an even more concerted effort. A phone call is harder to ignore than an email and can often be the push that your customer needs to get them to make payment. If you don't get through to them and you don't hear back after leaving a voicemail, send another reminder via email as well.

  7. Follow up every week until payment is received - If it's been three weeks or more without any payment, follow up with phone calls, SMS messages, and emails - to ensure you have covered all bases when it comes to reaching your customer about their outstanding payment. At this stage, it is also a good idea to consider offering flexible payment options, such as payment plans, if your customer is struggling to pay due to cash flow issues.

Reconsider your payment follow-up methods 

If you are struggling with consistent late payments, then it might be time to change the methods you are using to collect payments. Below are some of the successful best practices you can use to improve your accounts receivables process and get invoices paid on time:

Always remain professional

We've already mentioned this, but it's important enough to underline it again. The late payment crisis has put huge pressure on construction businesses, but it's essential not to let that frustration show when talking to clients.

Maintaining a professional, clear, and polite tone throughout your reminders and conversations is consistently the best way to ensure you get paid as quickly as possible.

This is especially true when the delay in payment is caused by factors outside of your customer's control. If your customer is experiencing financial difficulties, then treating them with professionalism and compassion can help ensure future business and goodwill.

Use the right channels at the right time

The key to getting paid is understanding when, and how, to remind your customer about their outstanding invoice.

Different payment channels have different response times and different reminder tactics. For example, the best way to remind someone about payment by email might be different from how you should go about reminding them of an invoice over the phone.

Here are some of the most common payment channels and how to approach them:

Email - Email is a great option for sending invoices, since it's fast, efficient, can easily be tracked, and you can easily attach relevant documentation and invoices. Email is best used as the basis for your payment reminder, to be supplemented by other forms of communication. Use the email to provide customers with their outstanding balance and payment due date, a reminder of any discounts or fees they could incur, and instructions on how to submit payment.

Phone - Depending on your relationship with the customer, phone calls can be a very effective way to remind them about their invoice. A phone call is harder to ignore than an email and can be used as a next step if you have sent multiple emails without getting a response. Additionally, phone calls are a great technique for detailed conversations and finding out exactly what is holding up payment from your customer. Phone calls are also a useful tool when negotiating payment plans. However, they are more time-consuming than emails, and cannot easily be automated.

Letters - Normally reserved for pre-collection notices and demands for payment, letters are a physical reminder that you're serious about getting paid. Sending a letter might seem outdated, but it can be effective if your customer has failed to respond to your emails and phone calls. Be sure to include all relevant information, such as the amount due, invoice number, and the relevant payment terms.

While emails, phone calls, and letters are the most common ways to pursue payment, construction businesses should consider diversifying their follow-up methods and taking advantage of the benefits that SMS payment reminders offer, including:

  • A higher open rate - SMS messages are estimated to have open rates as high as 98%, compared to an average of 22% for emails.

  • A broader reach - SMS messages can still reach customers who may be working on-site, not in an office environment, or may not have easy access to their emails, enabling you to reach them on the go and improve your chances of payment.

  • Instant payment - SMS reminders can also link customers to a payment portal with a single click, enabling them to pay immediately.

If you're considering using SMS reminder messages, then these SMS payment reminder templates can help you get started.

Implement credit checks

Credit checking during the onboarding process is an excellent way to mitigate the risk of late payments. By finding out more about potential customers' payment history, you can ensure that they have a track record of paying bills on time and make an informed decision about whether to do business with them in the first place.

However, credit checking shouldn't be restricted to just the onboarding process. Financial circumstances change, and staying up to date with your customer's payment history should be a continuous process.

By implementing credit checks at regular intervals, you can stay ahead of any changes that may impact the payment behaviour of existing customers and take preventative action to ensure payments are made punctually.

Regular credit checks can also give you the data you need to segment customers into different groups based on their creditworthy status. This can then inform your customer service and payment collection strategies. Knowing who you're dealing with is critical for developing successful relationships and finding the right solutions to ensure prompt payments.

Consider offering payment plans

Not all late payments are caused by negligence or bad behaviour. In some cases, customers may be genuinely unable to pay their invoices in a single lump sum due to unforeseen circumstances.

Offering payment plans can help you get paid quickly while being flexible and accommodating to your customer's needs. As mentioned, preserving relationships is important, and payment plans allow you to do this whilst still getting paid for the work you've done.

Of course, payment plans are not a catch-all solution. Consider the size of the invoice, check the credit history of this customer (can they be trusted to pay back future installments), consider how valuable this customer is for your business, whether or not interest can be added, and other important factors before you make an offer. See a full run-through of considerations to be made before offering payment plans.

Start charging late payment fees

If offering payment plans is the carrot, then late payment fees are a stick you can wield when the situation calls for it. As with offering a payment plan, implementing late payment fees should be done with thought and care.

However, they can provide an effective incentive to get customers to pay the outstanding amount when simple reminders have failed. They can also be used to cover the costs incurred in chasing up late payments.

If you do plan to change late payment interest, make sure you communicate this beforehand in your contract, payment terms, and on your invoices, so that the customer is aware of the conditions they are agreeing to and knows what to expect if they don't pay on time. See full guidance on how to implement late payment fees.

Your payment terms should contain the details of any late payment fees, and you should make it clear that the fee is a penalty for not adhering to the agreed-upon terms. Ensure these charges are reasonable; excessive fees will further discourage customers from paying.

Offer multiple payment options 

One of the best ways to get paid is to give your customers every opportunity to make a payment. Each customer has their own preferred way of paying, so it's important to provide a range of payment options, including credit and debit cards, ACH transfers, and other digital payment options such as Stripe.

Offering multiple payment options will make it easier for customers to pay you, and increase the likelihood of them making a successful payment.

Reducing late payments for construction businesses with accounts receivables software 

While all of the methods and techniques mentioned above are effective, they can be time-consuming to implement manually. Accounts receivable automation allows businesses to streamline the accounts receivable process, meaning that invoices can be sent out quickly and accurately, payments tracked easily, overdue invoices are automatically followed up on, and payer behaviour is tracked automatically on an ongoing basis.

Chaser is automated accounts receivable software designed specifically to assist businesses in combatting late payments, with features including:

Advanced custom schedules

Chaser enables businesses to set up custom payment schedules tailored to their customers’ payment behaviours. This allows you to chase payments at the best times and in the best manner for your unique customer segments.

Credit checking

With Chaser, you can credit-check customers during the onboarding process to ensure they are financially secure and won’t be liable for late payments. You can also conduct regular credit monitoring to ensure their financial situation hasn’t changed and make the required adjustments. Credit limits can easily be edited in the Chaser software in response to credit reports.

Automation

Chaser’s automated payment reminders and follow-ups can help businesses save time and resources when dealing with late payments. Chaser will automatically send out payment reminders that can be edited to reflect your brand and are adapted to the specific customer.

In addition to email reminders, Chaser now supports SMS text message reminders to help take advantage of the broader reach and greater open rate of this type of communication.

The human touch

Instead of making your communications look robotic and obviously automated, the editable temples of Chaser's reminders allow you to add a personal touch, and reflect your business’ brand. This helps maintain the customer relationship and can lead to better rates of collection.

All your reminders will appear to have come directly from you, with your branding, to help ensure customer trust and recognition.

Payment portals

Chaser’s payment portals summarise all the required payment information in one place and combine them with multiple payment options to give your customers all they need to make payment via the channel of their choice, instantly.

Payer behaviour ratings

Powered by machine learning, Payer behaviour ratings give you critical insights into your customer's payment behaviour, enabling you to better focus your time and energy on chasing the debt most likely to be collected.

Reduce late payments at your construction business today

Chaser has allowed businesses to get paid 54+ days sooner, reduce their days sales outstanding (DSO) by 75% and save 15+ hours each week on their accounts receivables management.

To find out more about how Chaser can help your construction business to reduce late payments and improve cash flow, book a free demo or sign up for your 14-day free trial today.