How to avoid late payments from customers: 6 best tips

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    Credit control & accounts receivables

    How to avoid late payments from customers: 6 best tips

    One of the departments of highest liability in a company, in terms of revenue protection, is Accounts Receivable (AR: the total value of unpaid invoices). This is because, in a time of rising inflation and a depressed economy, debtors are liable to have cashflow problems, leading to delayed payments, or complete defaults. These liabilities, in turn, create a cashflow problem and increased risk for companies to whom the monies are owed.

    Several recent factors have combined to make some business’s cashflow fragile:

    • The COVID-19 pandemic with its lockdowns and layoffs.
    • Supply chain issues, leading to a shortage of inventory.
    • Rising interest rates creating a knock-on effect on materials costs.
    • “The Great Resignation” making it harder to retain staff.
    • General recruitment problems in some key industries, including logistics.

    These varied factors have created a “perfect storm” of pressures upon many industries, creating instabilities in corporate cashflow, within a shrinking economy.

    Forbes Magazine recently reported the following worrying statistic: “One recent study found that up to 75% of businesses had less than two months of operating expenses’ worth of cash on hand. Pair this with the estimate that small businesses have around $825 million in unpaid invoices and it’s no surprise many hard-hit companies have shuttered permanently.”

    It is prudent for companies in 2022 to ensure that customers pay on time, so that they have a continuing cushion of operating capital. But how can this be achieved, when companies can’t easily force their debtors to pay up before debts become overdue?

    Fortunately, there are key strategies available to businesses to help them secure payments on time. In this article we’ll run through just half a dozen of them.

    It is prudent for companies in 2022 to ensure that customers pay on time, so that they have a continuing cushion of operating capital.

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    Strategies for Revenue Generation Through A/R:

    1. Credit check before you sign an agreement.

    Particularly when you’re selling big-ticket items, offering a subscription deal, or providing a line of credit as standard (mortgages, cars, school fees) ensuring you’re dealing with responsible, reliable borrowers is paramount. Incorporate a credit check as standard when agreeing to work with a new client, and then use a tool such as Chaser’s Credit Checker to assess their standing.

    Credit rating agencies in the UK include Experian, Equifax, and TransUnion. Most credit agencies, including Experian’s Intelliscore Plus, rank credit as a number between 0 and 100. A rating of 80 or more is generally considered as good, with 50-79 ranked as fair and under 50 as poor (high risk). Individual credit ratings generally run from 100 to 1000 and may be worth checking if you are dealing with a sole proprietor whose business debt is not legally separated from his or her personal debt.

    Being in the top 20% - 40% of any credit scoring system is the mark of a reliable creditor. Under that line, you may want to cross-reference a client’s credit rating with results with one or more alternative CRAs. To make this task easier, Chaser has a credit checking facility, which allows you to see a new client’s credit rating, recommended credit limit and payment score at a glance.

    2. Clarify the scope of work, and contingencies in advance.

    It may seem an obvious point, but companies shouldn’t agree take on work that isn’t completely specified. It can be tempting to accept a verbal agreement or a handshake deal regarding an item of work, without setting it down in writing. This is especially true if it’s a new client and you’re doing everything you can to seal the deal. This is a mistake.

    Imagine that once the job has been contracted, it transpires that the scope of the project is far greater than initially assumed. Do you return to the client to renegotiate the deal? Or take a gamble that you can still deliver, under the new terms, and protect your profit margin?

    The answer is straightforward - renegotiations are vital, and not just to preserve your bottom line. If the client’s expectations have changed, but you deliver only what was originally agreed, your client may feel (erroneously) that they have the right to withhold payment until the job, as they understand it, has been completed.

    To avoid such scenarios, each time you receive an order for a piece of work make sure the following are described in unequivocal detail:

    1. The timeframe for the job, including any hard deadlines.
    2. A detailed description of the scope of work (so that a third party reading the document for the first time would understand it).
    3. A budget for the job – what it must cost in total, as well as a breakdown, where possible, for staffing, materials, administrative and other costs.
    4. Detailed contingencies for running over time and budget.

    It’s far better to get everything agreed in painstaking detail, and in writing, before you start work. Otherwise, you may find yourself haggling over ambiguous or absent clauses in any dispute over payment. It pays to be pedantic, in short.

    3. Send invoices immediately.

    You don’t know what sort of cashflow issues your client may have, so you give yourself the best chance of speedy payment if you send your invoice as soon as the work is complete. When you do so, it’s worth copy-pasting the full scope of the job, as agreed, on the invoice, so that there can be no confusion over what you’re invoicing for.

    Don’t just send paper invoices, or PDFs by email. Use the immediacy of modern technology to copy your invoices straight to the responsible individual. A recent study by Square determined that 70% of small business invoices sent by SMS were paid on the day of receipt. Text messages have the immediacy that an email simply doesn’t.

    Here’s a dramatic set of statistics about invoice payment and due dates, courtesy of the Business Disputes Register:

    • 1 in 5 insolvencies are attributable to late payments
    • 30% of invoices are not paid within the agreed terms
    • Large companies take 30% longer than smaller companies to pay invoices
    • A UK government initiative to force larger companies to make public payment statistics and practices has not borne fruit so far.
    • Manufacturing companies generally prove worse payers than service companies.
    • Companies in the “Legal and Accounting Activities” sector have the worst reputation for late payment.
    • 90% of small company managers surveyed by the Register complained that they didn’t have access to information to assess whether they were trading with insolvent companies.

    With figures like these, it’s no wonder that a businessman as astute as Sir Richard Branson once said, “never take your eyes off the cashflow, because it’s the lifeblood of business.”

    4. Clarify payment terms on your invoice.

    In the UK, payment within 30 days is standard (or 28) but there’s nothing to stop you requesting “payment within 14 days”, particularly if you specified this in your original work contract. That said, being a little more generous with your terms gives you time to send out a payment reminder in advance of the final due date (see below).

    When you invoice, make sure you give full banking and transfer details so that your client can make prompt payment without having to email or call you back. The easier and quicker you make it for your clients to pay, the more revenue you will quickly recover.

    5. Consider using a payment portal

    Including a link to a straightforward payment portal can help clients to pay promptly. It’s just human nature – we tend to put off things that involve administrative work or bureaucratic procedures.

    A portal like Chaser allows you to list all jobs by company, including scope of work, invoice number, due date, and status, allowing regular clients to see at a glance what they owe. Then, when your client is ready to pay (which they are likely to do immediately), they can use a credit or debit card, Stripe, and other options. Payment can be made in a matter of minutes.

    6. Send a payment reminder before invoice due date

    Although you may have given a generous 30 days for payment, it’s a good idea to send a reminder of the upcoming deadline. You could do this at 14 or 21 days, for instance, giving your client plenty of time to arrange payment before the due date.

    As with your original invoice, do re-send all the relevant information (scope of work, costing, date of delivery, invoice number and more) so that your client has everything they need to hand. Again, this is something that a good payment portal, such as Chaser, can automate for you.

    Remember that you are entitled to charge interest for late payment of commercial debts. Under UK legislation set out in the 1998 Act of the Late Payment of Commercial Debts, you may charge 8% plus the Bank of England base rate (annually). This means that with a base rate of 0.5% you could charge an additional £85 per day for a £1000 debt.

    Furthermore, you can also charge reasonable late payment expenses to cover the costs incurred in debt recovery. This can amount to between £40 and £100 per invoice, depending on the total sum due on each invoice. It may be worthwhile reminding your client of these potential charges and penalties in the small print of your invoice.

    Don’t delay – make it easy to pay

    Several factors influence whether or not an invoice is likely to be paid promptly or not. The ideal invoice is:

    • Sent in a timely manner to the right department,
    • Referencing the original agreement.
    • Containing all mandatory information.
    • Outlining as simple as possible methods of payment.

    If you ensure your invoices always follow these four strictures, your AR department won’t be in constant pursuit of late payments. While there will always be bad clients, busy or disorganised ones can be prompted and assisted to pay their suppliers on time.

    Guidance for corporate invoices in the UK

    The UK government has issued guidelines for the mandatory components of a business invoice for it to be legally applicable:

    • a unique identification number (which you can devise)
    • the company name, address, and contact information
    • the company name and address of the customer being invoiced
    • a clear description of what’s being charged for
    • the date the goods or service were provided
    • the issuing date of the invoice
    • the amount being charged
    • VAT amount if applicable
    • the total amount owed (including VAT where applicable)

    In addition to the above, for sole traders, you must give your name and your business name, as well as an address for correspondence. The above forms a useful checklist for what makes a good invoice, which won’t be queried, set aside, or disputed.

    Why not check out our payment platform, so see all that Chaser can do to improve your cashflow and revenue? Book a full product demo or sign up for your free trial today.

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