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 In Finance, Starting

Late payments and unpaid invoices cause major headaches for many small business owners. Here’s how you can overcome invoicing issues and manage slow-paying clients.

How do late payments affect your business?

It’s a harsh reality that small businesses are typically at the bottom of the payment pile. If you’re a small business and the major multinational you contract to fails to pay on time, it can reduce your ability to pay your own staff, maintain your equipment and grow your business. How then do you maintain enough cash flow to stay afloat?

Crunching the numbers

Australian businesses are some of the worst in the world for being paid on time – 26.4 days late on average. Given the standard 30-day payment terms, this means many businesses wait up to two months for payment.

This lack of cash flow is a major reason why so many small businesses fail. With Australian small businesses owed $26 million in unpaid invoices, and business owners spending an average of 12 days a year chasing these late payments, you need strategies to deal with late payments.

FACT FILE

  • Australian businesses are paid 26.4 days late on average.
  • 90% of small businesses fail because of lack of cash flow.
  • Australian small businesses are owed $26 million in unpaid invoices.

What can small business owners do with late-paying customers?

Here are a few strategies that can help lessen the likelihood of late payment:

  • Negotiate upfront payments, or at least 50% payment upfront. For example, a florist might ask the venue to pay 50% of the fee before the event.
  • Make late payment fees a part of your payment terms. Be sure to state this at the start of the relationship. For example, an extra 2% penalty could be incurred after 30 days, or 3% after 60 days late.
  • Discuss payment and invoicing terms upfront. It may feel awkward – particularly if you’re a freelancer dealing with a big corporate client – but you deserve to get paid on time. Your ongoing business depends on it. Then firmly enforce your terms.

What procedures should you have in place for overdue payments?

It’s smart to have a system in place for dealing with late payments. Take prompt action whenever an invoice tips into overdue – even if it’s just by a day or two. Ideally, automate this process using software such as Reckon, MYOB or Xero.

Have a standard, polite email reminder that is sent as soon as a payment is overdue. If that doesn’t work, it’s time to send a follow-up. Remind the payer of those late interest charges you’ve spelled out in your terms of payment.

Still no joy? Then it’s time to call their accounts payable department directly. Or contact your lawyer if the payment is very large and very outstanding.

What’s the best way to deal with a recurring late-payment client?

Always give them the benefit of the doubt and try to have an upfront, professional conversation. Be sure to explain how late payments affect your cash flow and your ongoing relationship. Finally, ask how you can work together to improve matters. You might have ideas about how to streamline processes and methods of communication.

Consider the value of the relationship. If the late payer can’t get your goods and services easily from a competitor, explain you may be forced to withhold goods until they pay their invoices. If all else fails, consider if the cost of their late payments is serious enough to sever the relationship.

Finally, always make sure you aren’t relying too much on any one client. If you have diversified your income stream, then late payment from one particular problem client will have less of an overall impact on your business.

Are you experiencing cash flow problems because of late payments? Find out how Prospa can help with a small business loan.

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