The most important thing when you own your own business is ensuring that you get PAID. Late payments and outstanding debts disrupt cash flow which can literally kill a business. This post is all about a) preventing late payment and b) chasing up late payment. The goal should always be to never have clients owing you BUT if they do, as they occasionally will, it’s all about getting that debt settled as amicably as possible.
Ideally you do not want to be chasing up a late payment therefore prevention is better than cure. You can protect your cash flow by making it extremely difficult for a client to make a late payment. You basically need to be honest and upfront at the outset, so that there can be no doubt as to what you are expecting to be paid and by when. Take note of the following tips:
- Make sure that your clients know and understand your payment terms. Display your terms clearly in every invoice and explain how (“payment can be made by BACS transfer/SWIFT/Paypal etc”) and when (“payment is due by X date”) payment should be made. The idea is to make it as EASY as possible for your clients to pay you. You should also include information as to any late payment penalties i.e. “if your payment is more than one day late we will charge interest at a daily rate of X%”. If I know you are going to charge me interest at a daily rate of X%, I’m most likely to pay you on time. The invoice should be a one stop shop of how and when to pay, and the consequences for late payment. This is the basic starting point to getting paid and preventing client debt. If your invoices do not do this, REVISE them.
- Double check the details. Your invoice details should be perfect, quoting all the information the customer needs to identify it. Include your reference code and THEIR reference code. Give a good description of the work/product that the invoice relates to. You do not want a late payment to be YOUR fault so just make sure that all the details are correct.
- Send your invoices out promptly. If you want your clients to pay you on time, you better invoice them on time. If you invoice me a day or week late, I’ll take that to mean that I can pay you a day or week late and then some!
- Do some credit checks. You should credit check all new significant clients as part of your due diligence (due what? read this), but proceed with caution. A client may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Carry out your general due diligence and use your judgment – is it likely that this company/person can afford my services/product?
- Make them pay a deposit. The deposit method of payment is great for damage limitation with late paying clients. If you are going to ask for deposits, make the booking of your product or services conditional upon receipt of the deposit payment up front. No deposit, no deal. After a certain point in time make that deposit non-refundable too. The deposit provisions should be stated in the actual contractual agreement between the parties as the deposit happens at the start BEFORE the invoice which is issued after the provision of the services or product.
Chasing for payment
No business is perfect. Even your best clients can let invoices become overdue. Chasing and securing payment of an overdue invoice is a fine art in the world of business as you never want to offend a client. However, your company is entitled to the money, so don’t shy away from collecting what is due to you. Even charities hound their loyal supporters for donations! At this point, it is all about having a uniform procedure based on a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails (absolute last resort). Here are some tips:
- Know when your invoices are overdue and act immediately. In some industries it is easier and more acceptable to just pick up the phone and ask “hey where’s my money?”. However if you are dealing with a new client or are operating within a more formal industry, you should write a letter of reminder stating (politely but firmly) that your invoice is now overdue and please make immediate payment. You should send this letter by email or fax followed by a hard copy in the post. This way you get the reminder to the forgetful client asap whilst providing them with a hard copy for their records. I would recommend a letter of reminder regardless of industry norms because I’m a cautious lawyer and I believe in leaving paper trails in instances like this. In order for your reminder to have an impact, it needs to be prompt so keep a calendar of all invoice due dates and keep an eye on them. Send your reminder the day after late payment or your company’s grace period. Allow seven days for a reply.
- If there is no reply within seven days, send the invoice again. Send it by recorded delivery to ensure it has been received and keep your receipt as evidence that you sent it.
- If you still do not receive a response, make a phone call to find out what the problem is. Your client may have accounting issues or queries that it needs help with. Find out the reason for the non-payment and help them out. Negotiate if you have to and try to extract a promise of payment. ALSO use this phone call to find out if the customer has a regular weekly or monthly pay run and find out the day on which this is done. Keep calling until you receive payment, especially two or three days before the pay run. This is where chasing payment becomes a fine art. You need to tread a fine line between harassing the client too much and keeping the pressure up. It’s best to keep up a persistent chase! “Hey Bob How are you? Pay me please”, “Hey Sheila, I’m great thanks. Spoke to Bob the other day…pay me please”.
- If the pay run date passes and you still do not receive payment, consider turning up in person to collect it. Of course this is not desirable and it is not even possible in some instances. This is the last resort before the ABSOLUTE last resort.
- If you have tried all of the above steps and you have still not received payment, you need to consult your lawyer. There is nothing like a letter from a lawyer to scare the crap out of a client. The letter should threaten to take legal action to recover the debt or to start bankruptcy or winding-up proceedings (depending on how much you are owed, in the UK, you can end a company if they haven’t paid you – read this). The letter could also threaten to use a debt collection agency. Keep a copy of all correspondence and accept that if you are at this stage, you have lost that client forever. Not so bad as a client is only worth it if they value you and they show that they value you when they PAY you.
The legal/debt collector route is your absolute last resort, but don’t be afraid to use it. However if you get to this stage, ask your solicitor’s advice and evaluate how far you should sensibly go to collect the debt before cutting your losses.
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