Get paid on time Part 1
Let’s face it, most of us small business owners have had the experience of a late or non payer. As well as being extremely disappointing and frustrating, it can have serious consequences for small businesses, often meaning that they are unable to pay their own suppliers. It’s a well known fact that many small businesses fold not because they aren’t getting enough custom, but because of poor cash flow. So become familiar with your rights and know what to do encourage prompt payment.
Know Your Rights
The Late Payment of Commercial Debts Act makes provisions for SMEs employing fewer than 50 employees:
- You are able to charge interest at 8% above base rate on late payments
- You are within your rights to charge compensation (rates are set in law dependant on the size of the debt)
- You can sell the debt to a third party
These are statutory rights. Even if you have not stated them in your contract or terms and conditions you are entitled to add interest and claim compensation for debt recovery costs if you invoice remains unpaid after 30 days.
Try and encourage prompt payment in the first place
It’s vital to have a set of terms and conditions in place and make sure you send these to your clients at the start of your working relationship. ‘Standard’ terms don’t exist – they will need to suit your particular business. They should state what your payment terms are and what interest you will charge for late payment. Ask a solicitor to check them over if in any doubt. PDF your terms and conditions and email to the client and request acknowledgement of receipt to confirm they are in agreement. Email is no problem, just remember to file for safekeeping. Then, if there is ever any problem later on, it helps your case should you need to take a claim to court.
If you never did this with your clients when you first started working with them, think about doing it come new year or when you increase your prices. Simply send an email saying you have reviewed your terms and conditions and/or increased your prices and ask your clients confirm receipt and acknowledge.
It’s also worth bearing in mind that you don’t have to have the same terms for each customer. If you have a client who is notorious for paying late, you may want to shorten their credit terms or request part payment up front before work commences. If you are a business that has to buy in lots of supplies in order to carry out the work, you could invoice for these at the start and then send a separate invoice for labour later on. You may want to run credit checks on new customers, particularly those requesting a large amount of work. Your bank may be able to help with this or you can request reports online. It might seem extreme but you do really want to risk a lot of income in unpaid invoices if a company is not financially stable?
You may wish to consider offering a small discount, say 5%, for early payment. Remember though that this is only viable if your net margin is high. Are you going to offer it to everyone or just the late payers? One to think about carefully, but may be worth a go.
Take a look at Pay on Time for more on improving cash flow.
Next time: Getting your invoices right, how to chase payments