Late-paying customers can generate a lot of problems for SMEs, specifically when it comes to cash flow.
Chasing a client can be a difficult conversation as you want to make sure you get paid on time without damaging a repeat-business relationship.
Having systems in place can make sure you don’t act as a free lender to clients whilst avoiding confrontation.
Proactive communication
It can be nerve-wracking to have a challenging conversation with a client, but they are always necessary if payment is late.
In the run-up to the deadline, routine reminders should be sent to the client in a fixed and predictable cadence, like three emails before the due date and one on the day, for example.
The more routine these reminders are, the lower the chances a client will feel like they are being personally harassed by your business for payment.
When a payment does become overdue, you should not procrastinate, as reaching out early keeps all the options on the table.
You could offer clients flexible options, including Direct Debits, to close the payment gap and boost cash flow.
Where possible, warm correspondence over the phone increases your chances of getting a response and your query being resolved on the spot.
Any email reminders should include a copy of all outstanding invoices and an instruction to get in contact if their company is in financial difficulty.
Assuming good faith is important at early stages as genuine oversights are possible and it could just be that an invoice has been lost.
When to consider legal options
If your invoices continue to fall on deaf ears, it might be the time to signal to clients an intent to use legal action.
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.
In preparation, a firm should signal their legal intent to the client by sending a formal Letter Before Action, which can show seriousness whilst offering an offramp.
The legal pathway to recover payment should be considered an absolute last resort for businesses who want to preserve a client relationship.
- 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 payments should be routine for a business, avoiding escalation where possible by trying to find a friendly resolution.
The progression from reminders to firmer written notices, to a Letter Before Action is a careful escalatory ladder that places legal action as a backstop.
It shows a client you are calm but also serious about reclaiming your debt.
However, if one of your clients is a serial late payer, you should consider whether the prospect of repeat business is worth the uncertainty they cause your business.
As much as preserving client relationships is important, so is avoiding regular cash flow crises.
Seeking help from an accountant
Accountants can help businesses overcome the challenges posed by late-paying customers.
If you need help with managing your cash flow or need someone to find temporary solutions to meet liabilities, outsourcing work to an accountant can be a smart move.