Overdue payments really are the bane of most SME’s existence. Late payers can mean the difference between thriving and barely surviving and we have covered some of the ways you can reduce the risk of it happening in previous blogs. As with anything, prevention is always better than cure; you can save your company a lot of hassles, minimize bad debts, and improve cash flow by simply checking the credit of all clients that request terms.
But in the event of being in a position where payments to you are overdue, it can significantly help to have a standard collection process that you follow each time.
Alan Norton is head of intelligence at Graydons and states: “Receiving payments late can be detrimental to any business – regardless of its cash flow security. Not least because you’ll lose out on interest that you could have accumulated (unless you have an agreed late payment charge). But on a more substantial scale, being paid late can impact your company’s working capital and ability to meet debts.” (Alan Norton, head of intelligence at Graydons.)
Alan goes on to say “Small and medium-sized enterprises (SMEs) are often the most affected by late payments, as they tend to work with a small pool of clients who each comprise a larger portion of their income”. This means late payments can have a significant impact on their cash flow. What’s more, SMEs may be more reluctant to chase clients for payment, for fear of damaging the relationship. But this eggshell approach may only perpetuate the situation.
So, it’s important to apply some structure and process to what you do next:
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Don’t downplay the importance of timely payment. It’s understandable that you may be nervous of pressing a valued client for payment, but remember the knock-on effect late payment could have on your business. Furthermore, by failing to take action you’re setting a precedent that this is ok. To support your action, make sure you have clear payment terms in your agreement or contract with the client, so that you can refer the client to these without any reservations.
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Take direct action. Wait a maximum of two days after the payment date has passed to bring it to the client’s attention. It may be that the invoice hasn’t even been processed or drawn to the attention of the finance department, so swift action can speed this process along.
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Ensure you have an effective collection call by telephone. Collection by telephone can be a direct and efficient method of chasing late payment. Establishing clear objectives and procedures, and delivering effective training to employees can make all the difference to your success rate – and potentially salvage the client relationship.
- Send a letter: Letters are a polite way to remind customers of payments they may have overlooked. (It’s actually a good idea to send reminders a few days before a payment is due.) Create a standard form letter you can use in each situation; since it’s a form letter, customers aren’t likely to take it personally. Be sure to end the letter by asking your client to contact you to discuss payment—this gives them an “out” if there’s a problem on their end.
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Apply a short interval between actions. It’s important to allow the client time to deal with the late payment. However, after each action, decrease the time to the following action. And remember – if you’ve delivered a product or service, it is your right to be paid on time.
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After four actions, you have lost credibility. At this point it’s clear that your actions are not having an effect. Don’t dedicate more resources to chasing this payment. Escalate the issue instead.
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Involve the professionals. Having taken a systematic approach, it’s now time to involve payment collection professionals to save you time. They can use their resources and experience to determine the best way to collect payment.
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Learn from your mistakes. Make sure you use this experience to guide your actions in approaching other customers with similar behaviour. With future clients, you can benefit from having a free credit check performed before you sign the contract.
It’s important that you stay professional throughout your collection process so try and keep emotions out of it. Getting angry or making threats will not help the situation.
At this point, your goal is simply to figure out what the problem is and how you can possibly get paid. Assess how valuable the client is to you, how likely they are to recover from the current difficulty and become a paying customer once again, and how much of the money owed you can reasonably hope to recoup.
Here are the most common options:
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Ideally you want to get all your money back. Offering the client an instalment plan is often the best option for accomplishing this. Depending on your original agreement with the client, you may also be able to charge interest or late fees—but if this is going to make it hard for the client to pay you at all, it might be best just to charge them the original amount.
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Partial payment is another option especially if you can’t afford the hit to your cash flow that an instalment plan would cause, you. This way, you get some money faster at the cost of a long-term loss.
An efficient collection process boils down to being consistent, concise and above all patient. Try and understand the real reason for the late payment and by doing so you can often find a realistic solution that will work for both you and your customer.