Research by the FSB has reported that 37% of SMEs have run into cash flow difficulties, 30% have been forced to use an overdraft, and 20% cite a slowdown in profit growth as a result of late payments. If all payments were made on time, 50,000 more businesses could be kept open whilst the UK economy would receive a £2.5 billion boost. Seven out of ten small business owners cite cash flow problems as the biggest threat to their company, with late payment being one of the most common causes.
Step 1: Assess Your Attitude to Payment Risk
Ask yourself what level of risk you can take on payments. If the answer is no risk at all, payment in advance is the solution. This can restrict your market somewhat, especially in the B2B world where companies often expect to pay on account. If you decide to give terms, then you need to protect yourself using the following steps.
Step 2: Know Who You Are Dealing With
Be selective about who you work for and credit-check new prospects before starting to do business with them. Turning down potential contracts is not easy and needs a steely resolve, but if a company’s credit history looks less than impressive, you could be saving yourself future heartache. Creditworthiness should be monitored throughout the relationship, as a change may signal a payment issue looming.
Step 3: Tie Up the Terms and Conditions
Establish the terms and conditions under which you will be paid. It is a lot easier to set expectations at the beginning of a relationship — and make sure that you do it in writing. Watertight T&Cs establish the rights and responsibilities of both parties and can save a lot of time and money in the long run. Depending on the nature of your business, it can be a good investment to contact a solicitor to draw up a bespoke set.
Step 4: The Human Touch
Good communication and building a relationship with those involved in the payment chain is essential. People find it a lot harder to delay payment to those they have a relationship with. When you submit an invoice, ask if there is any reason why it will not be paid on time. People generally do not like to go back on their word.
Step 5: What If They Don’t Pay?
If you follow the points above, payment issues will start to reduce. But there are always a few customers who will present a problem. The key is not to shy away from the issue. As soon as they are late, contact them and find out why. Record everything in writing, be professional, and seek advice. Don’t make hollow threats about going legal if you are not prepared to follow it through.
The key in all cases is to know who you are dealing with, agree how payments will be made, keep to those agreements, build relationships, and if all else fails, seek advice early on.
