The Business

How to get paid on time

Get your payment terms straight from the start and follow up on invoices professionally to deal with problem payers

The credit crunch means you’re watching your business cash flow more closely than ever – and so are your customers. That means you want your invoices paid on time and they want longer payment terms. The Federation of Small Businesses says it’s the worst cash flow squeeze since the 1990s and over 80% of companies represented by the Forum of Private Business complain that late payments are getting worse. According to BACS, the average SME in the UK has £30,000 of outstanding invoices at any one time and is spending 17 days a year chasing payments; that’s best in Scotland and worst in London where it goes up to £51,000 owed and 38 days a year wasted.


Big businesses are the worst for late payments, with many routinely hanging on to invoices for over 100 days, but the knock-on effect means smaller suppliers who haven’t been paid may try to pass the pain along to you. Don’t bury your head in the sand and wait for your customers to remember your invoices on their own. Having a clear process for issuing invoices and following up on late payments can help you bring the money you’re owed into the business.

Pick your payment terms
Your contracts, invoices and terms and conditions should all include your payment terms; customers can’t pay on time if they don’t know when ‘on time’ is. 30 days is common (and the legal default if no other terms are agreed), but look at how quickly you have to pay for any items you’re supplying to customers yourself; if you have to pay up in 28 days then you’ll need to set terms of 21 or 14 days to get the money in time to cover those costs.

Check any purchase orders and other correspondence from customers that set out their terms and conditions as this may include longer payment terms that you can be ‘accepting’ by fulfilling the order. Your own terms and conditions should indicate that your payment terms will only be altered with your written agreement.

Staged payments and discounts
Offering a discount for prompt payment can be worth it if you need to improve your cash flow– say 2% if payment is made within 7 days. Show the amount they will save on the invoice in pounds; seeing a lower figure can be a strong motivation. You’ll need to factor this into your charges and you will often find you have to offer it to all customers, not just to bad payers. Also, some customers will pay the discounted amount even if they’re not paying promptly and it’s hard to recover the difference later. A prompt payment rebate scheme might work better; offer quarterly credit notes against future invoices in return for invoices paid on time. For long-term projects, especially if they’re being completed in stages, suggest staged payments as phases of the project are signed off.

Make it easy to pay
Cheques are simple but they waste your time and your customers’ time; they have to be signed, posted and taken to the bank, and then you have to wait for them to clear (three to five days, but fraudulent cheques can be reclaimed at any point). Make sure invoices show who cheques should be made payable to, but add your bank details (account number and sort code) to encourage customers to pay by BACS so you get the money more quickly: you can use the BACS Pay Me Direct logo on your invoice to make it look professional. And it sounds obvious, but make sure all the necessary details are on the invoice: details of the work, the purchase order number, the correct amount, the date and your contact details. Always invoice as soon as the work is completed and signed off.


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When you have customers making regular payments for the same amount, for a service or a support contract, suggest that they pay by standing order (and write a standard set of instructions with your bank details in to help them set this up). Payment by Direct Debit is more flexible because amounts can vary, but your business will have to pass a set of checks before you can use the scheme. And while you can sign up with an approved BACS bureau to accept payments if your business isn’t large enough to make it worth setting up to collect payments directly, charges can be high. Consider accepting PayPal payments, or setting up a secure Web page to allow customers to see their invoice status and make payment by credit card online.

Run a credit check
When you take on a new customer, run a credit check. It isn’t expensive: you can go direct to Experian, Equifax and Graydon, the ByteStart site offers a basic credit check for £5.95 plus VAT or your bank may offer a service. This won’t guarantee that you get paid but it lets you know how creditworthy they are and whether you want to suggest staged payments. If a customer has a poor credit record and they’re looking for an IT solution to turn their business around, you could end up with a very loyal client.
The credit check also gives you the correct name and legal status of the company, which you’ll need if you ever take legal action to recover a debt. And credit checks aren’t just for new customers. From September Barclays will offer continuous checking on ten of your customers, alerts if their credit rating changes and solicitors’ letters for chasing debts free (similar checks and alerts on an unlimited number of customers only cost £15 a month).

Deal with disputes
If a customer queries or disputes an invoice, you need to have a process for acknowledging that, investigating the issue and replying to them as quickly as possible; you can’t pursue a disputed invoice and the customer is going to feel perfectly justified in not paying up until they have an answer. If the dispute isn’t for the whole amount, write directly to the person who raised the issue to tell them that you’re investigating and remind them that there is a balance owing that’s not connected to the query. Include your account details, the order number and the amount due that’s not in dispute. This gives them a prompt reply without leaving any leeway for delaying payment on the amount properly due.

Your dispute process internally should pass the full details – including when the invoice was due and how much it’s for – on to whoever needs to look back at the work and compare it to the invoice. Give them a date by which they need to respond – to you or directly to the customer. When you have the details you’ll be able to reply to the query either by justifying the amount or negotiating a discount against the invoice. When you contact the customer with the details, remember to quote all the details including the balance due, as well as setting out your official view of events in a way that deals with the query conclusively, so you can expect payment.

Have a credit control system
Don’t just send off invoices and wait patiently. Create three standard letters to send when a payment is 7, 14 and 28 days overdue, and write a script for a follow-up phone call after the first letter. These should be polite and professional, reminding the customer that the invoice is due and mentioning your legal right under the Late Payment of Commercial Debts (Interest) Act to charge interest on unpaid invoices at 8% over the base rate, from the due date, plus standard compensation to cover the cost of recovering the debt (£40 for debts of up to £999, £70 for debts between £1,000 and £9,999 and £100 for debts over £10,000).

1. Download our friendly late payment letter ITExpertmag-debt-friendly-letter.doc

2. Download our formal late payment letter ITExpertmag-debt-formal-letter.doc

3. Download our harsh late payment letter ITExpertmag-debt-harsh-letter.doc

There’s a handy calculator at www.payontime.co.uk/calculator/statutory.html (see below for more links) for working out the interest owed if you want to include this as of the date of the letter. It doesn’t matter if the base rate changes during the period that the invoice remains unpaid; you use the one that applies on the date the debt falls due.

You should also state from the outset what your procedure is for dealing with debts that remain unpaid – and follow it.

 

If your region is full of late payers, you need to keep a closer eye on cash flow.

National average
2.5 hours weekly,
17 days annually
£30,000

Scotland
2.9 hours weekly,
20 days annually
£8,000

North East, including Yorkshire & Humberside
2.7 hours weekly,
19 days annually
£12,000

Midlands & East Anglia
1.8 hours weekly,
12 days annually
£26,000

Wales & the South West
1.9 hours weekly,
13 days annually
£26,000

North West
1.6 hours weekly,
12 days annually
£32,000

South East
2.1 hours weekly,
15 days annually
£42,000

Greater London
5.5 hours weekly,
38 days annually
£51,000

 

ByteStart credit checks
http://www.bytestart.co.uk/company-search.shtml

Collecting by Direct Debit
http://www.bacs.co.uk/BACS/Businesses/Direct+Debit/Collecting/

Better Payment Practice Campaign statutory letters
http://www.payontime.co.uk/collect/collect_letters_post.html

Late Payment Legislation
http://www.payontime.co.uk/legislation/legislation_main.html

Credit Services Association
http://www.csa-uk.com/csa/members-list.php

Statutory interest calculator
http://www.payontime.co.uk/calculator/statutory.html


 
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