Late payments are an issue that nearly every business will face. With the economic challenges over the last few years, from the pandemic to inflation, it has meant that late payments are on the rise.
In the last three months of 2022 over 50% of small businesses reported late payment of their invoices. In addition, research from Xero shows that on average, UK businesses are now waiting 30.5 days for payments.
Late payments will have a severe impact on a business’ cashflow and their overall financial health.
To help your business protect its cash cashflow, here are the four strategies you should implement:
1. Set clear payment terms
One of the most effective ways to avoid late payments is to set clear payment terms from the outset. Make sure that your payment terms are clearly communicated to your customers and that they understand them fully. This includes the payment due date, the consequences of late payment, and any interest or fees that may be charged. By setting clear payment terms, you can avoid any confusion or misunderstandings that may lead to late payments.
Top tip: By checking the credit profiles of your customers, it will help your business to set realistic payment terms. If a business has a poor payment performance or a history of defaults (often shown as CCJs), it’s a good idea not to give them long payment terms.
2. Use invoicing software
Invoicing software can help you streamline your business’ invoicing process, making it quicker and more efficient. This can help you get paid faster and reduce the risk of late payments. Invoicing software can also send automated payment reminders to customers, ensuring that they are aware of any outstanding payments.
Top tip: Invoice finance is a form of funding that can speed up the cashflow cycle from your invoices. Many invoice finance providers will also include invoice control, to chase the invoices for you. Helping take away some of the stress for your business and speeding up your cashflow
3. Have a late payment policy in place
Even with clear payment terms and invoicing software, late payments can still occur. So it’s essential to have a late payment policy in place to deal with any late payments that do occur. Your late payment policy should clearly outline the steps you will take if a payment is late, including any interest or fees that will be charged. By having a clear policy in place, you can take quick action to recover any outstanding payments and protect your business from the impact of late payments.
4. Get ahead of the risks
Whilst you can use the steps above to encourage on time payments, your business should also be aware of any risks that your customers or debtors might cause.
If a customer goes insolvent, your chances of a late invoice being paid at all are significantly reduced.
By checking the credit profiles of your customers, you can spot a declining payment performance or new legal notices (such as a CCJ or Gazette Notice). These are key signs that a business is in trouble, so will give you a headstart to chase up any late invoices from high risk customers and prevent you from being caught short.