We’re not pointing any fingers, but you know who we’re talking about! When it comes to late-paying clients, there are always a few stragglers. Although it’s not personal and usually just an indicator of clunky business processes, if you’re a small business trying to grow it is hard to be sympathetic. However, if most of your late-paying clients also happen to be your biggest clients, your problem is a bit more of a challenge.
According to ISME, the Irish SME Association, 55% of companies experience payment delays of two months or more (Q2, 2019). CEO Neil McDonnell points out that:
“Smaller businesses do not have working capital to wait for payment as long as big businesses. 36% of multinationals are taking longer to make their payments, showing a total disregard for SMEs.”
It all comes down to big companies wanting to have as much ready cash available to them as possible, but this can turn into a serious problem for SMEs in the long run.
Although no healthy business should be reliant on any one client, this worrying trend of late payments can be detrimental to a small business if not managed correctly. That’s why in this blog we’re going tackle the credit-control challenge head-on.
Should you be giving credit at all?
Providing credit is not uncommon in business, but it is not the rule and you are not obliged to offer it. If you’re a small business ticking over with only a handful of clients and you can’t afford to give credit, then perhaps you shouldn’t. In the creative industries and for freelancers, payment on delivery is the most common payment term. For larger or longer projects, it’s typical to pay half upfront, or even staged payments throughout the life of the project. Maybe your business could adopt a similar model? Take a close look at your current cash flow situation and determine what kind of figure you should be starting the month with. If getting to that figure requires bringing those invoice deadlines closer, then don’t be afraid to put your foot down. Remember, it’s your business and you make rules, not your debtors.
Set clear terms before you start
When a new project or contract comes through the door, it’s tempting to show how keen you are for the business and dive in as soon as possible. But not setting clear boundaries from the outset can be something you come to regret. If you do need to offer credit, then agree in advance what that will be and get it in writing. Ideally, this will already be laid out in your Terms and Conditions, but even so it’s worth drawing the new client’s attention to what these are. If you don’t have Ts & Cs already, or if you want this client to stick to different payment terms, make sure to get this agreed in writing beforehand including a) at what point(s) you will invoice, and b) how many days they will have to pay. If they subsequently don’t stick to these terms, you can start chasing straight away and draw their attention to the agreed terms.
Offer an early-payment discount
As with everything in business, you are dealing with human beings, which means that incentives and motivational tactics can work a treat – especially when it comes to saving money! You don’t necessarily have to offer this to all your clients, but you can pick a select few who you think would be open to the idea. You can offer them a discount for paying within, say, 10 days if that is helpful to your cash flow situation. The only drawback with this strategy is that payments may still be unpredictable. It is up to your client whether they take you up on your offer, and even if they do you won’t be sure exactly when they’ll pay.
Penalise those naughty late payers
Did you know that you are entitled by law to charge interest on late payments? It doesn’t just apply to your Irish customers, as this is a European Union regulation. The majority of businesses don’t do this, perhaps because they don’t know they can, don’t want to rock the boat, or think it isn’t worth the hassle. But you can do this for any commercial transaction and you don’t even need to send a reminder first; you can start charging as soon as the invoice is overdue. The Late Payment Interest rate is currently 8%. This means that if a client was a month late paying a bill of €2,000 + VAT, you’d be able to charge them €16.13 in interest. You can use this online interest calculator to work out what you are due.
In addition, you are automatically entitled to “compensation for recovery costs” without needing to provide evidence of having incurred recovery costs or issuing a reminder. This is a flat fee entitlement. If you had a particularly tricky situation and had to hire a solicitor or debt collection agency, this would obviously be a whole different situation. The automatic compensation you are entitled to under the regulation is:
- Up to €1,000: €40
- €1000 – €10,000: €70
- Over €10,000: €100
Automate the credit control process
These days, there is a software solution to alleviate any business ailment. If you’re tired of payments dribbling past the finish line like the world’s slowest snail race, the time has probably come for more proactive credit control. There are lots of fintech solutions for debt management out there that make it easy to chase late payers. Some examples are Chaser and Fluidly. With Chaser, you simply connect with your Sage, Xero, or QuickBooks account and set up auto-reminders so that your clients are prompted when their invoice is past due. Solutions like this allow you to personalise these prompts so that your business brand is kept intact. You can also control who gets reminders and how often, and even escalate the reminders to get more serious the longer the debt is outstanding – for instance by changing the recipient and sender of the reminder to more senior counterparts in your respective businesses.
Leverage outstanding bills with invoice financing
A 60- or 90-day credit window can become too much to bear for some small businesses. It’s a situation many businesses try to suffer through but there are ways to get around this problem if chasing your clients isn’t enough. If existing credit terms are now proving challenging for your company’s cash flow, you could look into invoice financing. Invoice financing is a finance facility that allows businesses to borrow money against outstanding customer invoices. Typically, you’ll receive a large portion of the funds immediately and when your client settles the invoice, you’ll receive the rest (minus a fee for the service, of course). This isn’t an ideal scenario in the long-term, but it can get you through a challenging period.
As you can see, there are many ways to manage late-paying clients. The key is to find the solution that works best for your type of business as well as your clients. It can be uncomfortable talking about this issue with clients, but never forget that you deserve to be paid for your hard work. Asking for what you are due is a fair and reasonable thing to do!
About the author
Scarlet Bierman is a content consultant, commissioned by Enterprise Ireland to fulfil the role of Editor of the New Frontiers website. She is an expert in designing and executing ethical marketing strategies and passionate about helping businesses to develop a quality online presence.