Waiting for invoices to be paid is a major problem for many small businesses, specifically because it has a detrimental impact on their cashflow.
With outstanding debts, a small firm may not be able to pay wages or overheads, which could prove fatal for the business, particularly if late payment becomes non-payment.
You understandably want – and need – to be paid for the goods or services you have provided, but equally you do not want to risk losing your biggest customer. So what do you do?
You should chase the payment as soon as it becomes overdue – if you give them 30 days to pay, call them on the 31st day if they still haven’t paid. A telephone call is harder to ignore than an email. It is also a good idea to have someone who does not manage the customer relationship chasing the debts to minimise the risk of damaging it.
It is important to remain professional – going in all guns blazing is unlikely to resolve the situation. Make sure your customer has received your invoice and has no issues with what you have supplied. Now politely – but firmly – ask when you will receive payment.
They might reply that they don’t have the cash, but will pay when they do. Of course, they might genuinely be waiting for money themselves, but often customers do have the money – they just allocate it to debts they consider to be more business-critical. Ask for some of the outstanding amount and explain that you will be unable to continue supplying them until the debt is settled.
You could also mention that you will have to charge interest for late payment. The thought of an increased debt may prompt those who really do have the money to settle up sooner rather than later.
It would be unwise to grant any more credit until the invoice is paid, as this will only exacerbate the problem.
If this approach doesn’t work then you may need to consider whether the relationship is worth protecting. If this is your biggest customer then losing them will obviously impact on your business, but at the same time you cannot afford to allow them continue missing payment deadlines.
In this case, you could consider debt factoring or invoice discounting, where, for a fee, you get advances against the value of your unpaid invoices. Alternatively, you may be able to secure the debt or get a personal guarantee from the debtor.
The key issue, however, is to establish why the customer is not paying on time. If there is even the slightest suggestion that they are experiencing cashflow problems then you need to agree a course of action to get your money before it is too late.
Legal action should always be a last resort but it is an option you may need to turn to if payment remains unforthcoming.
To avoid similar problems in the future, it is worth taking preventative measures such as credit-checking new and existing customers. Remember, everyone’s circumstances can change and credit limits should be monitored and adjusted accordingly.
At Milsted Langdon, we can assist with a wide range of matters, from collecting debts to advising businesses which are facing financial difficulties.