6 Tips For Dealing With Late Payments And Improving CashflowDecember 22, 2015
Having to cope with late payments can be extremely stressful for SMEs, despite legislation being enforced in 2013 which states debtors must pay what is owed within a 60 day period or face interest being added.
It is estimated that approximately 85% of small to medium sized businesses are affected by these late payments, which is shocking! So as an SME, how can you improve this situation and ensure that your business is not one of those being affected?
1. Update your software
First things first, you need to invest in technology to make your credit control process a lot easier and more accurate. This will allow you to structure your approach to your company finances a lot better and ensure you can implement a day to day cashflow strategy, instead of winging it.
Winging it will only result in you eating into your cashflow reserves as you continue to wait for payments to be made by your debtors. A clear process will enable you to have a clearer view of who owes you what and when, so you can implement a day-to-day strategy, thus hopefully cutting down the number of late payments.
2. Make sure whoever is chasing your payments knows the importance of establishing good relationship
It’s really important to establish a good relationship with people who might end up owing your company money. Ensuring that the person in control of your company’s finances is on good terms with the companies you supply to is therefore absolutely essential.
Ultimately, people will do good business with those they like and will make more of an effort to be on time with payments if they like your company and feel appreciated in their own right. Good relationships are powerful tools in business so make this a priority!
3. Don’t underestimate the benefits of running a credit check
Many SMEs don’t want to go through the rigmarole of a credit check each and every time they start working with a new partner/supplier. However, it is essential that you have a good understanding of the financial circumstances of the companies you are working with and for.
It may cost you a lot in the short term but this will be vastly outweighed by the benefits long term, especially if they have a bad credit history – as it could save you a great deal of stress, not to mention money!
4. Don’t be afraid to charge debtors interest on overdue payments
Unbelievably, many businesses are too polite to charge interest on overdue payments, although this is perfectly acceptable and legal! If you are finding that cashflow is tight and your customers/ suppliers are consistently paying you late, then add the interest clause in your payment conditions. Don’t be scared to add interest – the threat or carrying out of adding interest will soon make sure they start paying more promptly!
5. Maximise your credit lines with your suppliers
Unfortunately because late payments are so common, it has a knock on effect on the whole supply chain, which doesn’t help the UK business world! Payment terms are there for a reason and generally you will have a time period between 30-90 days to pay.
You should always take the maximum amount of time given to pay, but no more than that. This should allow you enough time to receive your own monthly/bimonthly receivables without having to dip into your cashflow reserves or overdrafts to pay your own debts.
6. Ensure debtors know that you will take legal action if required
Even though this should be a last step because it will, of course, cost you money, you should make sure that the companies you do business with are aware that you will take legal action in order to recoup what is owed.
To prevent actually taking legal action, make sure you place strict credit limits on those you do business with; make them aware of the payment terms and, as a final resort threaten legal action. More often than not, you’ll find this is more than enough to make them pay in a prompt manner.