A new survey of small and medium-sized businesses conducted by alternative finance specialist Time Finance has revealed that around three-quarters of SMEs have cashflow worries as a direct result of overdue customer invoices.

Furthermore, all SMEs surveyed in the report said that an increasing number of customers had been late with payments, around a fifth said that customer relationships had been damaged by being forced to chase money owed and 8 per cent said that late payments had contributed to a lack of working capital that had made key investments unaffordable.

The survey has thrown one of the biggest issues facing small business into sharp focus, with SMEs forced to tread a thin line between chasing payments they need for their working capital and not endangering valuable relationships with customers.

As businesses are hit by a wide range of adverse factors such as inflation, rising energy, labour and raw materials costs and falling consumer sentiment, getting this balance right has perhaps never been more important and perhaps never more difficult.

For that reason, it is vital for small businesses to have established processes in place for chasing late payments in a way that maximises their chances of getting paid as soon as possible, while limiting any damage to their customer relationships. Here are some suggestions of different ways and avenues for chasing payments at different times.

In advance
Before it actually comes to chasing late payments, it is vital to develop well regimented process for doing so ahead of time, to ensure that – in the event of an overdue invoice – there is a structure in place and the company isn’t scrambling to find the best way to chase payment.

The government’s Small Business Commissioner recommends that businesses take two key preparatory steps for chasing late payments: setting up a timetable for monitoring payments/making contact and getting a contact in the customer’s accounts department.

Setting up a timetable will provide a structure to fall back on when chasing payments, setting out the kind of contacts to make at different stages of the process, who to contact and the tone to adopt at different times. Accounting software can be used to automate this process.

Having a contact in accounts, meanwhile, means that a company always has someone to directly reach out to on issues relating to invoices and can provide them with any information they need to process an invoice.

Invoicing
One of the most effective ways to limit late payments is to invoice properly and efficiently, making it as easy as possible for a customer to pay. Businesses should ensure that all invoices are well formatted and clearly lay out all the information and details a customer will need in order to make payments.

There should be no typos or other errors that might appear unprofessional and potentially lead to queries or delays in payments. It will be valuable for businesses to develop a checklist for every invoice, detailing key information that should be on the invoice, including a unique invoice number, the company’s name and address, customer’s name and address, summary of service rendered, date service rendered, date invoiced, cost of services rendered, VAT, total amount due, date payment is due, payment details etc.

As with setting up a timetable for payments, businesses can also use billing software to help minimise errors and can help payments be made quicker and easier by sending automated invoices that enable clients to pay online.

What to say and when
A key aspect of developing a timetable for chasing late payments will be laying out basic contacts to make at various points in time. Around the time that the invoice is sent, businesses could send a quick courtesy email asking the customer to confirm they have received the invoice and that it contains the information they need – this will help to eliminate the risk of the invoice being ignored or missed.

Another courtesy email or message could be sent as the payment due date approaches (say, ten days beforehand) just to check whether the invoice is processed and due to be paid as part of the customer’s next run of payments.

Once an invoice has become overdue, an email should be sent enquiring whether there is a problem with the invoice that might be preventing or delaying payment and seeing whether there is anything that the business can do to resolve the issue.

From that point on, regular reminders should be sent that the invoice is overdue up to either the point it is paid or the point that it has been overdue for 30 days. Once an invoice has been overdue for 30 days or more, the customer should be warned that further steps might be taken if it is not paid promptly.

Escalating the issue
Businesses will of course hope that they don’t need to escalate when chasing an invoice, but even if it never happens, it is still important for processes to be in place. The first step, typically, will be to attempt to speak to the customer directly to try and solve the issue. Being able to show that this attempt has been made will be valuable if it is ultimately necessary for further steps to be taken.

If a customer still hasn’t paid, there are a number of steps a company can take to escalate the situation. They might seek to take the issue higher than their contact in accounts or their account manager, instead speaking to someone more senior.

The customer could also be reminded that interest can be charged from the payment due date and back-charged for the time since it became overdue. If necessary, the company could also warn the customer that they could stop supplying their services or products until the debt is cleared.

If a customer has signed the Prompt Payment Code but is still paying late, then a company can issue a challenge for the Chartered Institute of Credit Management to investigate.

Final steps
If escalating the issue hasn’t worked, then further steps may have to be taken. This could include acting on warnings to charge interest or stop supply or, in a worst-case scenario, calling in a mediator or ultimately making a court claim for the unpaid amount.


In our next blog, we’ll look at the other aspects of chasing late payments, such as the tone of voice to adopt at different stages, checks that can be carried out as part of the process of chasing payments and some of the legal options that are available to small businesses if an invoice is not being paid.