Getting paid promptly by your customers is crucial to the cashflow of any healthy business, particularly in the current medical and economic climate as the COVID-19 pandemic progresses. Sara Beaumont discusses five key ways to collect what you are owed.
SME businesses are missing out on funds that should be in their bank accounts – or better still invested in growth – because customers don’t pay their invoices on time.
Research from the CBI suggests UK business are owed £30bn in late payments at any given time. Moreover, the average business carries £31,000 on its debtor books – a significant amount of cash for many SMEs. Here is some best practice advice to ensure you don’t fall foul of late-paying customers.
1. Get to know your customers
Effective two-way communications is vital in all areas of customer-relations – and especially reducing the risk of late payment.
The better you know your customers, the better you will be able to resolve any issues regarding delayed payment before they escalate.
A strong relationship also makes it easier to pick up the phone or send an email to chase a late payment in a friendly and informal manner.
2. Insist in your late payment rights
Setting out your terms and conditions plainly and unambiguously is an effective way of ensuring customers have no excuses to avoid paying up on time. A straightforward statement that you will pursue your rights under late payment legislation sends a clear message to customers who may try to free up their own cashflow by restricting yours.
All you need is a line in your terms and conditions to the effect that you will exercise your statutory right to claim interest and compensation for debt recovery costs under late payment legislation if you are not paid in line with agreed credit terms.
The Late Payment of Commercial Debts (Interest) Act 1998 means you can claim interest at 8 per cent per annum over the Bank of England base rate (at the previous 31st December or 30th June). Currently, this is 8.25 per cent per annum from the date the invoice became overdue to the date it is paid.
3. Be sure to claim compensation
In addition to interest, you can also claim compensation for every invoice that is not paid by its due date. Compensation depends on the amount you have invoiced.
For late payments of up to £999.99 you can claim compensation of £40 per invoice, rising to £70 for invoices between £1,000 and £9,999.99, and £100 for every invoice over £10,000.
4. Make your invoices foolproof
Invoices should be easy to understand, simply formatted and, above all, accurate. If your bill contains incorrect or contradictory details – such as wrong dates, names or addresses – you will confuse the customer and effectively delay your own payment.
Your invoices should include all the information your customer needs in order to settle the debt – such as the purchase order number, payment terms, due date, delivery date, unit cost, VAT and total amount payable.
Almost all invoices are emailed these days, but if you do send them through the post, always use first class stamps – second class mail not only arrives later, but can give an impression of penny-pinching inefficiency.
Also, it’s important for invoices to reference the late payment legislation and the extra costs of payment after the agreed date.
5. Carry out credit checks.
Use a digital credit management system to keep track of customers’ accounts and generate automatic reminders when payments are late.
In addition, you should implement a collection strategy, for example phoning or emailing before due dates to ensure payment is in hand.
Just as importantly, make sure your employees are fully trained in credit management and debt recovery.
Finally, you can arrange credit insurance cover if a bad debt arises due to a customer becoming insolvent, along with legal expenses insurance which covers the costs of debt recovery through the courts.
For further advice on making sure your customers pay on time, or any debt recovery matter, call Sara Beaumont on 0161 761 4611 or email her at email@example.com