A reported 82% of small businesses fail due to cashflow issues. Getting money coming into a business is crucial to be able to pay bills, grow and even survive.
When customers don’t pay invoices on time, it can be incredibly stressful.
However, as a business, understanding how to prevent late invoices, and how to respond to them can make all the difference.
When customers pay invoices late, it puts cash flow pressure on businesses. By having good customer relationships, reliable invoicing, late fees and different payment options, you reduce the chance of customers paying late. If it still happens (and it probably will from time to time), invoice financing can help with cash flow in the mean time.
Statistics on late payments
According to research from Xero, small business owners spend an average of two days a month chasing payment on late invoices. When you have all sorts of other things on your plate, that’s a lot of time wasted doing something that you shouldn’t have to do.
But it is important, because if you don’t do it, you probably won’t see that money. At the very least, it’ll certainly take longer to get it.
The reality is, it happens. All too often. Around 20% of businesses in New Zealand are routinely late to pay their bills. Those that are late pay around five days after the bill was due.
It’s even worse in Australia. On average, Australian businesses pay their bills more than 10 days after they’re due. This means that an invoice with a standard 30-day payment term isn’t paid for nearly six weeks. And remember, that’s just the average.
Businesses have a lot of overheads to cover in such a time frame, and when invoices go unpaid, that can mean a lot of financial pressure just to cover those running costs.
Why do late invoice payments occur?
There are a range of reasons why late invoice payments occur, and not all of them are your customers’ fault. That’s an important point, because it pays to make sure you’re not making one of these mistakes in your own invoicing:
- Payment details aren’t clear, such as your bank account number or the due date.
- Customers don’t receive your invoice. If you email it, it could go to their junk mail. You may also be sending it to the wrong person.
- You send invoices too late. Rather than waiting to invoice for your work at the end of the month, send the invoice as soon as you’ve finished the work.
All of these reasons can lead to customers being late to pay invoices, and it helps to be up to date with proper payment practices.
In saying that, it’s usually the fault of the customer. Often, there is no reason – either they forgot, or they just didn’t process the invoice. Other explanations include:
- Paying invoices at a certain time of the month that is upcoming
- Having poor cashflow themselves
- Payments take time to be approved
5 Effective tips for dealing with late invoice payment
So what can you do to minimise late invoice payments in your business? There are a range of techniques you can use at all points of the invoicing process to encourage customers to pay on time.
1. Establish a good relationship with your customer
A good business relationship encourages your customers to pay invoices promptly.
This means having agreed terms laid down in advance so both parties know what’s expected in invoicing. They will come to know automatically when you’ll invoice them, and how long they have to pay. Spend time developing a good invoice terms and conditions template that you can reuse for different customers.
If your customer has a dedicated finance or accounts department, introduce yourself to the people who will actually be processing your invoice. If they recognise and know you, they’re more likely to help you.
A good relationship involves good communication, and this helps you to deal with any issues that do arise.
Having a good relationship also helps you to identify signs that customers can’t pay their invoice on time, so you can take action before finding out they can’t afford to pay you.
2. Invoice properly and promptly
It’s vital that you invoice correctly. If you don’t, customers are more inclined to just not pay the invoice rather than point out that you’ve made a mistake.
Make payment details clear – particularly your bank account and the due date. Itemise invoices too – it helps customers to see exactly what they’re paying for and avoids questions that can lead to delays.
In terms of invoicing promptly, as mentioned, this should be as soon as you’ve finished a piece of work. If it’s an ongoing customer relationship, invoice at the same time every month – the end of the month is generally the norm.
3. Charge late fees on invoices
Implementing late fees on your invoices helps to encourage customers to pay them on time. No one likes extra costs.
However, you can’t just decide to charge extra if a payment is late. Legally, you have to actually tell your customers they exist in advance. Specify late fees in your invoice terms, or tell them if you don’t have a written contract.
Pay attention to the late fee wording in your terms too. Be specific – tell them what the late fee is, and when it’ll apply. A standard late fee is anywhere from 2 – 15% above the official cash rate. In some parts of the world, late fees can be 10% of the value of the invoice and apply from the day after it was due to be paid.
You should also specify that any collections costs will be passed on. If you do require the services of a debt collector, these can often be up to 30% of the invoice value. You want to make sure your customer pays this fee if collection action is needed, and not you.
4. Make payment easy
Today, there are a range of different payment options that businesses can use. Different businesses have different preferences, so it helps to include a range of options to make it as convenient as possible for customers to pay you.
Find out what matters to your customers; it may be worth making a new option available in order to make things easier for them.
This includes using third party payment providers such as PayPal, Venmo or Stripe. These providers are becoming increasingly popular for the convenience and security they offer. Just watch out for and understand the added cost to you and how this affects your margin.
5. Chase late invoice payments
If a customer doesn’t pay their invoice on time, check in with them to remind them payment is overdue. Most of the time, they’ll apologise and arrange for it to be paid straight away.
Be polite when you reach out to them – ask them if they’ve missed the invoice, or invite them to get in touch if they have any issues. Attach the invoice again for their reference, in case they missed it the first time.
Invoice payment reminders can be automated through most online invoicing software, which can make it easy to do.
You don’t have to wait until an invoice is overdue either – sending a reminder the day an invoice is due is perfectly acceptable. If you want to do this, it’s worth ensuring your records are up to date and the invoice hasn’t already been paid.
How FundTap can help with invoice payment
While you can take effective steps to prevent late invoice payments, the reality is, it will still happen. The most important thing is to be able to handle it when customers don’t pay invoices when they’re due.
This is where FundTap comes in. As an invoice financing service, FundTap helps businesses to relieve themselves of the financial cashflow pressure that comes when customers don’t pay their invoices on time.
Yes, you still have to chase customers for payment, but at least you can pay your own bills, wages and overheads on time.
FundTap works by lending businesses cash based on their invoices. From a business perspective, you effectively get your invoices paid straight away. When your customer pays the invoice, that amount is direct debited back to FundTap, plus a small fee.
FundTap is easy to set up. It takes just five minutes to create a free account, and businesses can be approved for funding in just an hour. From there, once you apply to have an invoice funded, the money can be in your account the very same day.
There’s no paperwork required either. FundTap links directly to your online accounting system, so you can request funding from your existing dashboard. This makes repayment simple and hands-free too, so there’s no extra effort required on your part.
What’s great about that is you don’t have to change the account your customers pay you into. Other invoice lenders take over the payment account, so you have to change the bank account your customers pay into when you start using it, and change it back again once you stop.
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