Chasing up unpaid invoices can be one of the greatest sources of frustration for small business owners, and one that can very easily escalate into a much larger cashflow issue that can potentially threaten the business’s very survival.
Operating a business without extending any lines of credit is unviable for most SMEs, yet all too few SME owners have a plan in place for managing invoice payments and tackling problems with late and unpaid debts.
If chasing up debtors and cajoling clients to settle their invoices on time is starting to drain your resources and leave you struggling to balance the books, you’re not alone. According to research conducted by the BACS payment scheme, almost half of all UK SMEs are regularly paid late, representing a total of £26bn owing to UK SMEs at any given time.
However, there are several proactive steps that you can take to reduce the likelihood of late or unpaid invoices, tackle serial late or non-payers, and create working policies that best support prompt invoice payment.
In this article I will share five steps SMEs can take to avoid late and unpaid invoices. Read on to learn more.
1. Assess your general credit terms and payment policies
First up, you have to have clear credit terms and payment policies in place outlining your expectations when extending credit, and ensure that your prospective debtors sign off on them before they receive goods or services.
Given the fact that 63% of SME decisionmakers lose sleep over cashflow and 32% specifically cited concerns over late payments as the source of their unrest in 2017, simply ensuring that your expectations for payment are clear from the get-go can help you to mitigate potential problems before they even arise.
Offering informal lines of credit or failing to make your expectations clear is virtually guaranteed to ensure that clients don’t see any urgency in paying up, and is likely to result in a lot of time wasted chasing invoices.
- When setting up credit terms, there are a number of factors to consider. You will need to look at elements such as when an invoice actually becomes due (such as upon delivery, or within a set period afterwards), and how much credit you are able to extend to each client at any time.
- You should also outline within your credit terms what will happen if an invoice is not paid on time, in terms of how you intend to follow up and escalate this and the additional costs involved.
- Additionally, make sure that you have dotted your I’s and crossed your T’s when it comes to your own in-house policies and procedures. Who is responsible for checking that monies owed have been received, matching them up to client accounts and balancing the books? How and when would your policies or systems let you know if a client fell outside of their terms? How can you ensure that you’ve double-checked that an invoice has not already been settled before you start following up?
These are all things that you need to have procedures in place for before you extend credit or chase up debts.
2. Set up payment terms that incentivise prompt payment
Whilst it is important to make your expectations clear, you can avoid potentially souring a relationship with a good client by setting up payment terms that incentivise settling invoices sooner rather than later.
The shorter the window provided for your payment expectations, the sooner you are likely to be paid. This might be self-evident when it comes to companies and individuals that reliably settle their invoices within the given timeframe, but it also helps to incentivise those who feel less of a sense of urgency too.
The sooner an invoice comes due, the more urgent it is for the debtor to pay it, and often, the businesses that extend the longest payment terms are those that have the greatest problems shaking down that payment when it finally does become due.
A sense of urgency and giving the clear impression that you’ll be on the ball about collecting what you’re owed should simply be portrayed as an efficient business practice rather than a cynical expectation that a client won’t pay up from the get-go, and this can help to prevent problems arising further down the line.
Additionally, offering a small discount or incentive for early or prompt payment when this is factored into the prices you set will not only help to incentivise payments, but may also help to ensure brand loyalty from prompt payers too – which are of course exactly the type of customers you’ll wish to attract.
3. Know when and how to chase up late invoices
When it comes to dealing with invoices that are already overdue, there is a fine balance to be made between recouping monies owed and potentially sullying your relationship with a valuable client, and this needs to be handled carefully.
Often, a gentle nudge is all that is required, and you don’t want to go in all guns blazing for an invoice that is just a day or two late.
However, setting a precedent of failing to follow up late payments until they are seriously overdue isn’t a good idea, and will result in a continual stretching of the boundaries of when other people consider it appropriate to pay you.
Ergo, it is important to have a plan in place for how you will chase up clients once their invoices become overdue.
There are two main pathways to follow here; tackling the problem personally, or outsourcing invoice chasing to an accountant, solicitor, or specialist credit control organisation.
The benefits of handling things in-house include a potential cost saving (although often at the expense of your time) and retaining more control over the whole process and so, having a better understanding of where you are with clients. Also, a personal approach can often help to incentivise payment in ways that a large, faceless corporation or automated communication will not, as you’re forcing the customer to see the human side of your operation, and deal with a real live person who is impacted by their late payment.
On the flipside, for some serial debtors and people who like to push the limits or avoid paying at all, handling things in this way may also be the best way to be ignored.
If you outsource invoice chasing or keep some degree of separation between the business and its debt handling, this will free up a lot of your time to do other things, but at a cost. Bringing in a third party to handle things can provide a sense of professionalism and urgency for debtors who will often then prioritise payment because they know that your company is on the ball about it, but for others, the impersonal nature of this makes such communications much easier to ignore, or put on the back burner.
Many SMEs begin invoice chasing by handling it in-house, later considering outsourcing if the desired result is not achieved or the resources spent chasing invoices makes this uneconomical. This is often a good way to handle late payments, as long as you draw a line in the sand in terms of when and how you will escalate the debt later on.
If you intend to take this approach, here is a sample outline of how a late invoice chasing policy might look:
- A couple of days before an invoice’s final due date, send a polite, friendly reminder inviting the client to make payment or contact you if they have any questions or queries.
- Within a couple of days of an invoice’s due date passing, send out a friendly reminder, drawing attention to the payment terms and conditions that were agreed to at the outset. Always check first to ensure that the invoice hasn’t been paid in the interim without you realising, and factor in delays for bank processing times etc. too.
- If you don’t receive any response to your overdue reminder within a week, follow up again, with a polite note drawing attention to your invoice and prior message. At this point, you might also want to think about making a direct phone call to the client, as letting them know that you’re personally on the case will often help, as mentioned earlier on.
- If your invoice still hasn’t been settled a couple of weeks later, it is time to send out your first more formal communication requesting payment, and outlining the steps you intend to take if the invoice remains outstanding. This communication should be business-like, clear and direct, but always polite and unemotive, simply informing the customer of your policies and how you intend to proceed.
- Still no luck? Don’t wait more than 10-14 days after your first formal communication before you send another formal request for payment, with a greater sense of urgency clarifying that the debt is now overdue and falls outside of your payment terms, and how you will escalate things once more.
- You may also want to follow up with phone calls during this time too.
- If you have failed to garner a response from your various emails and calls within a month of the invoice becoming overdue, you will have to face the reality that your client is unwilling or unable to pay, and it is time to think about escalating things on your side. I’ll look at your options for doing this within the final section.
4. Have a plan for dealing with serial late payers
Serial late payers – people who really push the limits – can be a real problem for small businesses.
When faced with such clients, it will probably cross your mind that the client in question isn’t worth the hassle and should not be provided with credit again. But for those accounts that are worth keeping, how can you deal with serial late payers without risking losing their business entirely?
First of all, take a long, hard look at each of your serial late payers and be objective about how much you really need their business. You might find that the time and expense of chasing them up and handling the cashflow shortfall they cause actually makes them unprofitable accounts, in which case you’re better off without them.
Whilst saying no to an income stream is never easy, be objective about whether your time and resources could make more money for the business than it does when spent on handling one perpetually late payer.
Next, think about why and how you’re having issues with late payments to begin with – are you perhaps working with historical clients who were never told your payment terms, or customers with whom you don’t have a formal credit agreement and contract in place?
If this is the case, that’s the first thing to address. Advise both new and past clients of your current credit terms, and ensure that all of them sign off on it before you extend them any further credit. For serial late payers, ensure that you reinforce your commitment to receiving prompt invoice payments, and highlight the penalties and procedures in place for late payments.
Also, assess each late payer individually, and look for common factors within their late payments – such as if they occur when the value of the debt exceeds a certain amount, or if late payments tend to occur at certain times of the year when the business in question might be going through seasonal quiet periods themselves.
This will help you to mitigate many serial late payers by finding approaches to counteract their payment delays – perhaps by capping the credit limit for each client and requiring any prior invoices to be paid in full before further credit is extended.
For clients that can be patchy with payments due to seasonal difficulties or other industry-specific issues, discussing this with them and working out a payment plan or instalment system for future credit can help to take away the guesswork, ensure that payments come in, and avoid a lot of chasing up later on.
Proactively seeking solutions like this can also help to ensure that your customers remain loyal to your business as well.
Large companies and big brands are often the worst late payers, and such companies are usually adept at ignoring personal or informal approaches and take a long time to pay because there is not one person responsible for dealing with the invoice and so, no sense of ownership or urgency from the employees tasked with handling it.
For this reason, it is often wise to look at escalating to a more formal approach and/or outsourcing invoice chasing to an external body sooner rather than later when it comes to handling accounts with bigger clients. By following a formal procedure of set communications on a set timescale and escalating things along the timeframe you’ve indicated, those larger businesses who don’t like to pay any earlier than they have to will be more likely to prioritise paying you than someone else who is less proactive about getting their monies owing.
5. Escalation – how to get bad debts paid in a timely manner
If you’ve got nowhere with your attempts to get invoices settled or are concerned that a client doesn’t intend to pay you at all, you will probably need to escalate things in order to get paid.
You might wish to do this sooner rather than later depending on your client and the calibre of the debt, but even if all of your customers are small-scale and you rarely have a problem that you cannot eventually resolve on your own, you need to know your options for escalating problem debts, and how to choose the best approach.
This might mean handing the debt off to a credit control agency, or submitting a civil court claim for payment. Whatever approach you take, take it in a timely manner and always follow through with actions you say you will take within the timeline you provide, to retain the sense of urgency and let the client know that this is not something that will go away if ignored!
Credit control agencies can take a lot of the hassle out of invoicing and payment chasing, and many of these offer a start-to-finish service, monitoring and handling your invoices from the moment they are raised to the moment they are paid.
Small business credit control agencies can also step in further down the line to take on accounts that are overdue, and up to a certain point, what they do and the communications they send out on your behalf are essentially no different to those you might send to your customers yourself.
However, knowing that a credit control agency is handling things can help to incentivise faster payments, because the debtor knows that your business is on the ball about getting paid, and won’t let things slip.
If you’ve escalated things as far as you can either on your own or using a credit control agency and the invoice is still outstanding, the endgame regardless of the route you reach it by will be making a civil court claim against the debtor.
Once more, you may wish to use a credit control agency for this, but it is also something an individual or SME can do themselves (and usually do), and so it is rarely worth bringing in an outside body and paying them accordingly just to submit a civil court claim on your behalf.
Assuming that the courts find in your favour, your debtor will be ordered to pay the monies owing to you, along with reasonable expenses such as the court and filing fees, interest, and any other approved costs incurred as a result of the overdue debt.
Should the client fail to pay after a court order has been made to this effect, you will need to chase this up with the court itself.
Ultimately if you still don’t receive payment when a court has found in your favour, the next step is to look at instigating bankruptcy proceedings against the debtor in question.
If the client fails to pay due to a genuine inability to do so, instigating bankruptcy and making a claim against the business’s assets is likely to be your only chance of recouping some or all of the monies you are owed.
However, few unpaid invoices are likely to culminate in such a dramatic conclusion, and the threat of a public impending bankruptcy over a potentially small debt is usually more than sufficient to shake down those final late payers who are simply dragging their feet!
Ultimately, most businesses will face an issue with at least one or two chronically late payers or unreliable client accounts over the course of their lifetimes, and there is no sure-fire way to avoid this.
However, by actioning the five steps outlined above, you can reduce the number of late invoices you have to chase up and increase the chances of ensuring that your invoices are settled in full and on time in the future.
Polly Kay is a British copywriter and content writer with a digital marketing background. After studying Marketing (BA Hons) at university, she first honed her skills as a copywriter by working in-house for an award-winning creative agency in London before branching out on her own in 2012. Today, Polly Kay Copywriting and Content Writing serves clients ranging from small and medium-sized enterprises in the UK to well-known multinational brands. Polly specialises in SEO-friendly content writing for online use, and both brand-led and direct response copywriting for all applications.Read full profile