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Late payment letters
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8 Ways To Prevent Late Payment From Killing Your Business

Late payment continues to be a big problem for many small businesses. According to the Federation of Small Businesses (FSB), on average, small UK firms are owed £6,142 in unpaid invoices, mostly because of late-paying large-business customers.

The FSB estimates that 37% of small businesses have run into cash flow difficulties caused by late payment, with 30% of these having to use their overdraft as result. It believes late payment causes 50,000 small-business deaths a year, while prompt invoice payment would provide a £2.5bn billion boost for the UK economy.

While many small businesses have 30-day credit terms, research by Lloyds Bank suggests that large businesses on average take 37 days to pay their suppliers. And while, on average, 19% of large firms take between 40 and 49 days to pay an invoice, 12% take between 50 and 59 days. And, worst case, 2% of large businesses take up to 80 days, which would cripple many small firms’ cash flow.

If you grant credit, there will always be some risk of late payment, but you may be able to minimise the chances it will affect your business. So, what should your small business do?


1. Don’t be too generous with your credit terms…

Ideally, you wouldn’t grant credit until it’s earned, but some customers won’t buy unless you do it straight away. Buying on credit can be the norm in many sectors. To limit your exposure, don’t give too much credit or be overly generous with your terms (30 days is sufficient). Set credit limits and stick to them, until the relationship is better established. For high-value orders, agree staged payments or part payment upfront, and the balance on supply.


2. Credit-check all new potential customers…

Carrying out credit checks on all new customers that request significant credit is recommended. The UK’s three main credit agencies are TransUnion, Equifax and Experian (free trials are normally available, with monthly charges thereafter). For high-value accounts, carrying out at least yearly or half-yearly credit checks can provide assurance.


3. Ask potential customers to complete credit application forms…

Many businesses ask customers to complete credit application forms, requesting key details and explicit acknowledgement of your credit terms. Then customers know what will happen if they pay late. A simple request for trade references, so you can to speak to their existing suppliers, can help you to decide whether or not to grant credit.


4. Send your invoices as soon as possible…

The longer you take to issue your invoices, the longer you’ll have to wait to get paid – which can place additional unnecessary strain on your cash flow. Make sure all of the necessary information is contained in your invoice and that it’s correct. The due date for payment should also be stated clearly. Send your invoices by email (in a readable format), if possible, because it can be easier to lose hard copies, which will only delay payment.


5. Have a reliable credit-control system in place…

Ideally, it should alert you automatically, shortly before an invoice is due for payment (some accounting software options include this convenient option). Then you can send a quick email reminder to your client or customer, telling letting them know (in a friendly, yet firm way) that payment is soon due, and – crucially – that they should pay you within the agreed terms.

Send another reminder on the day of payment, restating the invoice number and amount outstanding (or you could simply attach the invoice again). Email can more easily be ignored, so, a quick, polite but firm, phone call can help to ensure that payment is made.


6. Provide affordable incentives for early payment…

You need to crunch the numbers before ever offering discounts, but giving a few quid or percent off for early payment could be worthwhile for your business. Alternatively, you may offer small discounts on future purchases. This may be enough for some customers to settle straight away. Remember to occasionally thank customers for prompt payment.


7. Build good relationships with your customers…

The closer you are to your customers, probably, the less likely they are to delay payment – especially if they genuinely value what you provide them with. That’s not to say that you’ll always be paid promptly. You may need to show some understanding and flexibility, because your customer may themselves be waiting for payment. However, their credit expectations must be realistic. It’s your money that you’re owed; your business doesn’t exist to subsidise others.


8. Take advantage of invoice finance…

Invoice finance can enable you to quickly raise cash against the value of your unpaid invoices. Typically, you receive most (up to 90%) of the value of your unpaid invoice straight away from a lender, then get the balance, minus the lender’s fee, when your customer pays the invoice.

There are two types of invoice finance. With invoice discounting, your customers won’t know you’re using invoice finance, because you stay in control of collecting payment. If you choose invoice factoring, the lender collects payment from your customers, which can save you time and effort. Invoice finance can make late payment much less of an issue for your small business.  

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Mark Williams

Mark Williams is an editorial consultant, freelance content writer, business journalist and editor. For 15 years, he has specialised in writing content for and about UK SMEs.

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