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Getting paid on time
It’s become something of a cliché, but the phrase ‘cash is king’ is as true today as it was when it was coined. For cash-strapped growing businesses, getting paid on time is an essential ingredient of survival.
But how can you guarantee that your hard-earned money will arrive promptly? Unfortunately, the reality is you can’t; but you can take steps to mitigate the risk of late payment.
The right way to do it
As with many other potential business pitfalls, it is better to prevent this problem than respond to it after the event. For suppliers of goods and services, that means drawing up a list of credit terms before you start going after contracts.
It could be as simple as a single-page document, stating how long you are prepared to wait between invoicing and payment. Be crystal clear about what you expect from customers and explain the steps you will take if payment is not received.
Action list:
- Credit check potential customers – make sure they have a good track record
- State your payment terms in your pitch to potential clients – be honest
- State them again on your invoices – make sure they accept terms in writing
- On invoices, also include a timetable of when you expect money to arrive
- For example: ‘Payment due 30 days after invoice – April 30’
This should be conveyed in plain English; try not to be too aggressive with your language, but make sure you convey the message that you will not tolerate tardy payers. In general, it’s better to be too demanding than too lax in the early days when cash is tight and your business is growing.
Remember: you could be taking on countless lucrative contracts, but it will mean nothing unless you’ve provided the service, invoiced and the money’s in your account. If your customers aren’t paying you, then cashflow problems could be just around the corner.
As you grow and establish close ties with customers, you might like to become more flexible with loyal clients who have a spotless track record. It’s no good coming down on them like a tonne of bricks unless they’re causing you a problem.
If they still won’t pay up
Unfortunately, it’s a fact of life that customers don’t always pay up when they should. You naturally want to keep potentially big money customers happy, but give them too long a leash and you could go under before you get the chance to realise the relationship’s potential.
Thankfully, the government has put in place measures to help you chase up late payers, including fines and the threat of interest on their debts. Many small businesses opt to use these weapons as deterrents only, and rarely follow through with action.
How you use them will depend on your relationship with the client: if they are valuable and the delay is a one-off, be as lenient as possible; but if they are persistent late payers you might need to take a sterner stance.
Your options:
- You can claim debt recovery costs if customers won’t pay up – the amount varies according to the amount owed to you, but the top amount is £100
- More importantly, you may also charge interest on delayed payments at 8% above the Bank of England’s basic interest rate
- Representative bodies (such as business lobbies) can challenge grossly unfair payment terms set out by powerful big business customers on behalf of small companies
The key lesson here is: make your payment terms clear and leave nothing to chance. If your customers know your credit terms, then payment problems should be kept to a minimum.
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