Late-paying customers are one of the biggest causes of cash flow problems for SMEs.
It can be a tense situation as you want to make sure you consistently get paid on time without damaging a repeat-business relationship with one of your clients.
By having procedures in place, there are ways to make sure you don’t act as a free lender to clients whilst avoiding confrontation.
Reach out early
While having a challenging conversation with a client is no one’s idea of fun, they’re always necessary if payment is late.
When approaching a deadline, routine reminders should be sent to the client in a fixed cadence, such as two emails before the due date and one on the day.
The more systematic the reminders are, the less clients feel as if they are being personally nagged by your business.
If a payment becomes overdue, it is important not to procrastinate and to reach out as early as possible to keep your options open.
This could involve setting out flexible payment options, such as Direct Debits, to begin closing the payment gap and improving your cash flow.
Early correspondence with the client should be kept warm and over the phone where possible, to better your chances of queries being resolved on the spot.
Email nudges should include copies of the invoice to clearly state that payment is overdue and to get in contact if the company is in financial difficulty.
Good faith should be assumed at early stages because genuine oversights can happen and an invoice might be lost or stuck in approval.
Considering legal options
If invoices continue to gather dust, it is time to begin to use the legal backstop as a signal.
The Late Payment of Commercial Debts (Interest) Act 1998 reserves the right for firms to claim interest, compensation and the ‘reasonable costs’ of collecting a debt.
Under this Act, your business has the right to claim statutory interest of eight per cent above the Bank of England base rate and fixed compensation per invoice.
Before acting, a firm should signpost their intent by sending a formal Letter Before Action to warn of court proceedings if payment isn’t received.
However, the legal pathway should be seen as an absolute last resort for businesses who want to ensure their client relationship stays intact.
Here is a summary of the compensation that can be claimed per invoice depending on its value:
- Debt up to £999.99 – £40
- Debt between £1,000 and £9,999.99 – £70
- Debt of £10,000 or more – £100
Preserving client relationships
Chasing late-paying clients should be procedural and routine, avoiding escalation where possible by trying to find an amicable resolution.
Moving from reminders to firmer written notices, to a Letter Before Action is a measured escalatory ladder that offers clients multiple offramps before legal action is initiated.
It shows calm escalation whilst signalling to the client you are serious about reclaiming your debt.
While client relationships should be maintained where there are possibilities of repeat business, serial late payers can cause regular cash flow crises for SMEs.
In this case, you should consider whether their unreliability is worth the value of their contracts for your business.
Seeking help from an accountant
Accountants can be extremely useful to SMEs dealing with late-paying customers.
Whether it is helping businesses manage cash flow, find temporary solutions to meet liabilities or enforcing statutory interest penalties, accountants can help your business.
Get in contact today and book a consultation.
