Late payments and unpaid invoices are the bane of businesses everywhere, causing cash flow calamities that can cripple a business operation within months.
In fact, large businesses pay an estimated 53% of SME invoices late, according to a report by Xero, costing small businesses across Australia a total of $7 billion per year.
While there’s no silver bullet to avoiding late payments, there are other business owners who have been around the block a few times and don’t mind sharing their words of wisdom.
“If I provide a service, I always pay my cleaners whether I get paid or not,” explains Paul Brice from MD Commercial Cleaning.
“In turn, this incentivises me to be relentless around chasing up monies owed to me. After 10 visits, 40 phone calls and countless emails, my oldest bill was paid after being 361 days overdue.”
When is it time to start chasing?
Tom Valcanis, a professional copywriter and Founder of I Sell Words, starts chasing late payments straight away via a friendly email.
“Cash flow is the lifeblood of any business and ignoring late payers will cause trouble before too long,” Valcanis says.
Brice says he also starts immediately chasing payments, with the assistance of automated accounting software.
“I use Xero, which has a reminder setting that can be set or not set at all, client by client,” he says.
Three days into overdue territory Brice then follows up the email reminder with a phone call, keeping the language light but to the point.
“Another follow up is made on day seven, this time using a statement, which for some reason, seems more effective than sending another reminder or a copy of the original invoice,” Brice adds.
When you’re getting nowhere
If you’re still not making progress, Brice suggests asking the debtor for some specifics around how payments get made, including if they use an outside bookkeeper.
“I then ask for the details of the person that ‘presses the button’ to pay us to talk to that person directly,” he says.
“If I can get the person responsible to make a personal promise to me to pay me on a particular date, I have a very high success rate.”
Valcanis, on the other hand, prefers to take a more hardline approach to recover unpaid debts by sending the debtor a letter of demand, the first warning that you’ll pursue legal avenues.
“If things get that far and you’re worried you’ll lose their business, I would argue they’ve burned their bridge by not paying you,” he says.
That said, legal recourse is not for everyone, he says, as there are many loopholes and caveats in the process meaning that a ‘win’ isn’t guaranteed.
“I successfully won a case at VCAT against a delinquent client and they still haven’t paid.”
Valcanis says an effective and low-cost alternative to taking a business to a tribunal is lodging a default with a credit reporting company such as CreditorWatch.
“CreditorWatch allows businesses to lodge defaults against ABNs/ACNs delinquent on payments over $100 and if they’re overdue,” he says.
“The threat of default is unpleasant but does show you’re serious.”
Strategies to reduce late payments
Valcanis says it helps to ask clients for a deposit upfront – somewhere between 20–50%.
“I also use clear and direct language about their obligations when coming to pay – I get a digital signature on all proposals I send out,” he says.
“And I offer instalment plans, as long as we agree to a strict schedule: 20% on this date, 20% on the next date and so on. Being vague or thinking ‘she’ll be right’ isn’t good enough.”
Additionally, Valcanis adds you can also try enforcing a late fee.
“I usually apply 2.5% to any bill over 14 days overdue. This certainly gets people’s attention,” he says.
Brice says that as your business matures, you should aim to work with higher-quality clients. Customers usually get two to three chances before he cuts ongoing ties.
“In the beginning, it’s probably beneficial to take more risks to get the business moving but this becomes less important as things get established,” he says.
When it comes to a client saying they’ve made a payment, Valcanis says, “Trust, but verify.”
“Don’t simply take a client’s word that they’ve paid you; ask for a remittance or deposit slip,” he says.
“Don’t be afraid of being the ‘annoying’ chaser of payments. You’ve done the work; you’re entitled to it. If a business owner doesn’t want to be hassled, all they need do is settle their invoices.”
Unpaid debts starting to act as speed bumps for your business? Talk to a Prospa small business finance specialist about whether a line of credit can help smooth your path.
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