Late payment by customers can quickly derail your ongoing business plans, and make effective cash flow management extremely challenging. They’re a constant source of frustration for most business owners, but crucially, a real threat to success.
So here are three tips to help you deal with late payers, keep bad debt at bay, and proactively manage the cash flow that’s vital to your business.
- Adopt strict credit control policies
A good credit control system should include:
- Clear terms and conditions on invoices, and all other relevant documentation
- Credit-checking new and current customers – it’s important to credit-check on a regular basis, as if a customer starts to experience financial difficulty you’ll need to protect your own business.
- A straightforward, consistent, and reliable system of chasing payments – this could comprise telephone calls, reminder letters, emails, statements, and where necessary, a solicitor’s letter to warn of legal action.
- Setting realistic credit limits and sticking to them – if necessary, you could place a ‘stop’ on customer accounts that exceed the set limits.
- Using your right to charge interest on the amounts owing. The Late Payment of Commercial Debts (Interest) Act, 1998, allows you to charge a certain level of interest on qualifying debts.
- Offering discounts for early payment – a significant incentive for your customer
- Use technology to stay in control of late payers and cash flow
Accounting software keeps you up-to-date with who owes you money, how long they’ve been in debt, and the actions you’ve taken so far. You can also invoice customers from within the software – if you invoice quickly, and include a link for them to pay electronically, you may find your cash flow issues naturally ease.
You’ll also be able to anticipate your cash needs over several months using information held within the accounting software. Forecasting your cash flow lets you know when a shortfall is likely, so you can take appropriate steps to secure finance well before it’s needed.
- Secure invoice finance
Invoice finance is a flexible form of alternative funding that helps your business in a number of ways. It enables a regular input of working capital each month, based on the value of your sales ledger.
Typically, up to 90% of invoices can be advanced by the lender with the remaining amount, minus fees, being received when your customer pays. Invoice factoring also allows you to outsource your credit control function to the factoring company – an important issue if your current exposure to bad debt is significant.
You can choose a confidential option if you prefer, so that customers aren’t aware you’re using invoice finance. Both factoring and invoice discounting are extremely flexible, and easy to set up when compared with traditional bank finance.
Taking control of late payments and managing your cash effectively is largely achievable by putting in place effective systems and processes, using technology to stay informed, and taking advantage of the many forms of alternative finance specifically suited to small businesses.
Author’s bio; Gary Addison is a director at Redundancy Claim and has helped thousands of company directors at their lowest ebb with advice around redundancy and statutory entitlements.