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Why A Small Business Can’t Afford Not To Have the Hard Conversations About Late Payment

If your business that invoices your clients, you’ll know the frustration of dealing with overdue payments.

Late invoice payment is more than just an inconvenience, and it happens all the time. It causes cash flow issues that contribute to more than 80% of business failures.

This is your guide to dealing with late paying clients while also preserving your working relationship.

TL: DR

Late invoice payments put pressure on business cash flow. It’s important to set up an invoicing system that includes processes for chasing up late payments while also encouraging and enabling clients to pay invoices on time.

The late payment dilemma

One of the hardest parts of chasing up overdue invoices is walking the line between being stern and being friendly and polite.

Most of the time, just reminding a client they have an overdue invoice is enough to get them to pay. It’s probably just an oversight that’s easily fixed.

Read more: Small business financing tips

But if there’s an issue or a query, it can get awkward. This is where you have to strike the right balance between being accommodating and assertive.

Why do small businesses need to have hard conversations about late payment?

Following up overdue invoices isn’t something business owners really want to do. It can seem confrontational and uncomfortable, but the alternative is accepting that an invoice may not be paid.

There are many reasons why it’s important to be able to have a tough conversation with a late-paying client.

You need money for working capital

Working capital is crucial for businesses to grow. This often involves getting some form of finance. However, just because you want to get a loan, it doesn’t mean that cash on hand isn’t important. Having your invoices paid by clients is a no-cost option that can boost working capital.

Read more: Business finance options

They need to make asset purchases

Businesses often need to purchase equipment and other assets that allow them to grow. This can be a significant cost.

They need money for growth and expansion

Being able to produce more and do more business costs money. The initial investment in growth activities will pay off, but first you need to be able to cover the costs involved.

They need money to cover day to day operational costs

Cash flow is crucial for all businesses, and invoicing can put pressure on your ability to cover overheads. When you invoice clients, it can take weeks to get paid after completing work, and you need to be able to cover your own costs in that time.

When a client doesn’t pay an invoice when it’s due, you need to continue to pay those costs. For small businesses that don’t have large bank accounts, this can be a serious issue.

To cover development and marketing costs of their products

The money your business generates is often reinvested back into the business to fuel growth strategies through marketing, product development or increasing your capacity.

Ensuring invoices are paid on time is one way you increase the capital you have available.

How do late payments affect your business?

As a small business, late payment of invoices is particularly problematic because you probably don’t have the large margins or bank account of bigger companies. As mentioned above, even covering operating costs from your own bank account can be an issue.

When a client doesn’t pay an invoice on time, you need to be able to cover wages, utility bills, rent, stock purchases and other costs yourself.

This is why it’s important to have money in the bank, and where having an invoice late payment fee can really help – more on that shortly.

Structure the conversation based on the due date

When considering how to talk to clients about their invoices, it helps to consider just how overdue the payment is.

1-3 days late

Get in touch with the client soon after the invoice becomes overdue. If the client is usually reliable, there’s a fair chance there’s been a mistake and payment won’t be made until they realise what’s happened.

You can be fairly friendly with your reminder email and alert them to the fact payment is overdue. As with all of these emails, be sure to attach the original invoice in case they haven’t seen it.

7 days late

If an invoice still hasn’t been paid, or if you haven’t heard back from the customer a week after payment was due, it’s time for another reminder.

Read more: Credit line requirements for your business

Remind the customer the invoice is still outstanding, and provide a timeline to avoid escalation – 14 days is a common measure. If you charge an invoice late payment fee, alert the customer to the details and make them aware that it’ll cost them extra if they still don’t pay.

21 days late

After 21 days, it’s time for the escalation you warned the client about. Have a senior team member call the client – there’s nothing quite like getting them on the phone.

You can still be polite, but speaking directly gives you the chance to portray a sense of urgency while also being reasonable. It’s much harder to strike that balance in an email.

This can also be a time to arrange a payment plan or offer flexibility if your client isn’t able to pay the whole amount.

30+ days late

If you still haven’t had payment (or any meaningful conversations) with the client after a month, it may be time to take firmer action. You can contact a lawyer about your options, or talk to a collection agency.

Be aware that escalating late payments takes time and energy, and can also be costly. On top of that, it can damage your relationship with the client.

Tips to deal with late paying customers

A big part of the approach to dealing with late invoice payments is about preventing them in the first place – not reacting when it happens. These are some of the best tips for SMEs to manage invoicing and reduce late payments.

Charge late fees

When you charge an invoice late payment fee, it costs clients if they don’t pay on time. By making it in their interests to pay an invoice when it’s due, clients will prioritise your invoices over others that don’t charge late fees.

Legally, businesses that charge late payment fees need to notify clients about it in advance.

Allow for electronic payments

Ideally, it should be as easy as possible for clients to pay you, and electronic payments are perhaps the most universally acceptable way of transferring money. You can integrate a pay now option on your online invoices so clients can make payments there and then.

Set realistic payment terms well in advance

Payment terms outline the rules of engagement for payment between you and your clients. This is where you can outline late fees, when invoices are due and accepted forms of payment.

Set payment terms at the beginning of your relationship with the client and include them with your invoices so they can always be referred to if needed.

Invoice correctly and promptly

If you make a mistake on your invoices, customers will query them and it’ll take longer for it to be paid. Not only that, but mistakes are a big no-no.

Read more: The complete guide to improving business cash flow

If you’re invoicing for a one-off job, submit the invoice as soon as you’ve done the work. This just means the due date is sooner, and you’ll get paid earlier.

Chase payments immediately as and when they are due

Set automated reminder emails in your online invoicing software for the invoice due date. There’s no benefit in waiting a day or two – as with the previous example, the sooner you start chasing the invoice, the sooner it’ll be paid.

Be persistent

If you give up on chasing invoice payments, chances are you won’t be paid. In saying that, if it’s for an insignificant amount of money then it might be easier to cut your losses and move on.

Take legal action

Legal action can take many forms depending on the circumstances around the invoice. It’s often expensive and time consuming, but drawing a line in the sand also sends a message that you won’t give up on chasing invoice payments.

Take home message

When clients don’t pay invoices on time, they’re at fault – not you. Don’t be afraid to chase them up; often all it takes is a polite reminder email and they’ll pay the invoice immediately.

Better yet, put systems in place that encourage and enable clients to pay invoices promptly, so you don’t have to spend time chasing up overdue payments.

Lastly, consider using invoice factoring to help get through the cash flow issues that late invoice payments create. The main benefit of invoice factoring is it lends the value of invoices, replicating the effect of a customer paying their balance immediately.

Even if they’re late to pay their account, you’ll be able to cover your overheads and make payments without having to dip into your bank account.

Find out more about how invoice factoring with FundTap works today.

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