Late payments: Top mistakes small businesses make when dealing with late payers
A new report from Xero, the global small business platform, revealed for the first time the magnitude and impact of late payments to Australian small businesses, putting the value of outstanding, late payments at $115 billion a year.
The research found that half of all trade credit invoices are paid late and that solving the problem would see small and medium businesses (SMBs) benefit by $4.38 billion over 10 years.
It shows that late payments for small businesses are a real issue that can potentially even make or break a company’s future. It’s a tricky thing to deal with – what is the right approach to ensure your customers are paying on time? How do you manage that relationship?
We asked the experts this week to share their opinion on the top mistakes small businesses are currently making when dealing with late payers.
Greg Waldorf, CEO, Invoice2go
Invoices that go unpaid for a significant amount of time can be stressful for any small business, and cause lasting cash flow issues.
One of the biggest mistakes small businesses make when dealing with late payers tends to happen before the invoice has even been sent – it happens when invoices are not issued in a timely manner to begin with.
Sending invoices on-the-job with a mobile invoicing app on your smartphone or tablet means you’re asking for payment when the job is fresh in the customer’s mind.
It’s equally important to send a friendly payment reminder in a timely manner, so the customer hasn’t completely forgotten that they have an outstanding invoice. Mobile invoicing apps can help to remind small business owners to follow up with any late payers, and remove friction points during the payment process. By keeping payment processes simple, customers are more likely to settle outstanding invoices in a timely manner, keeping small business cash flow consistent.
Patrick Coghlan, CEO, CreditorWatch
One common mistake we will see SMEs making when dealing with late payments is that they might not know what to do about the relationship with the customer, and therefore, it impacts on debt collection. Whether the debtor has been a customer for years or if the SME is just happy to have the business, letting the relationship get in the way can cause implications for cash flow.
The best practice to maintain the relations and deal with latepayments is to approach the debtor about it straight away. Calmly approach the debtor about the late payment, let them know you value their relationship and take interest in their situation. Make a plan and adjust payment terms if needed. If the situation is dire and the debtor is not respecting terms, then you may have to use debt collection tools. Relationship aside, this is your business and cash flow is king in your survival.
In order to avoid straining relations all together, stop being flexible and establish boundaries. Your payment terms should be clearly established from the start. Stay aware and stay on top of due diligence practices. Finally, realise that every latepayment will affect your cash flow, now or in the future. The cost of writing off debt can catch up, so ensure you have a solid credit management and. Debt collection process in place.
Chris Rich, Head of Customer Success for Square Australia
Unfortunately, late payments are a real problem that affects many small businesses, and Australian payment times are among some of the worst in the world, with invoices paid on average 27 days late. Consistent and reliable cash flow is the lifeblood for businesses so as a business owner you need to do everything you can to ensure you get paid on time.
Make sure your payment terms are included up front, so as soon as you’re engaged with a customer they know exactly when payment is expected. One of the most common reasons for late payment is a dispute over the amount, but by sending a quote in advance, your customer will have no surprises when they receive the final invoice.
E-invoicing apps are also a must these days, they are paid up to 80 per cent faster than traditional invoices. Many e-invoicing apps also make it easier for your customers to pay in just a few clicks, rather than having to log into a banking app or make an electronic transfer. And don’t forget about consistency, sending instant invoices as soon as a job is complete will help your customers be more prompt in their payment.
Leo Tyndall, CEO and Founder of Marketlend
“Our experience comes from running a lending platform that minimises risks for investors while maximising growth for SMEs. Critical for this is best practice around addressing delinquencies and heading off repayment issues. Here are some tips from this approach that should help you minimise problems and even strengthen relationships with your payers for the long-term.
First, deal with late payers promptly. Communication is central to this. Find out what’s going on and then work with it. If a payment plan is a solution then agree on one. If you plan on accepting credit, you must review payment history. If applicable, identifying assets and securing them can also be important. But, again, the key is not letting things get out of hand. Nip late payments in the bud —always. And you’re definitely not alone if this worries you. Because there is so much concern around payments, we recently built and launched a solution called UnLock to deliver more flexible payment terms and the take-up has shown the widespread need in the market for dealing with payment issues in a way that helps business thrive.
Stephen Barnes, Byronvale Advisors Pty Ltd, Management Consultants
The biggest mistakes SMEs are making are burying their heads in the sand, ignoring the issue, procrastinating and not dealing with the issues of later payers. Some businesses are too shy to ask for the monies owed to them, however, you are effectively lending a late payer money – after all it is money that should be in your bank account. Not only that, you are doing so at zero interest rate to someone with a bad credit rating. Make sure a sales contract or engagement letter is provided at the beginning to the contract, and it is clear exactly what product or service is being provided and what your expectations are with regards to being paid. Also use technology built within the accounting systems to send out reminders. Setting expectations upfront will increase the likelihood of being paid on time and the accounting systems reminders will make it less confrontational for you if they happen to pay late.
Deborah Southon, Director, FSA Group/Easy Bill Pay
I am surprised by the number of Australians who miss payments or succumb to late fees due to a lack of organisation, forgetfulness or alternatively a lack of funds.
There are apps available which SMEs can use to avoid late payments, and subsequently the unexpected additional fees and costs. These apps send reminders or notifications which inform the user of their upcoming bills. Educating late payers on the benefits of paying on time, such as taking advantage of discounts offered by providers, strengthening credit score and easing the worry and stress related to late fees can help recognise the importance of paying on time and keeping up with payments.
Getting tech savvy for SMEs can also be a fundamentally important asset in the digital changing world. For example, apps like Easy Bill Pay helps SMEs manage their finances, save money on discounted bills and put aside the amount of payments that the business will have for the month. This is a type of technology that assists SMEs to become more practical and focus on other business elements rather than worrying about payments. They are also useful to manage cash flow.
David Sharrock, Managing Principal of Sharrock Pitman Legal, and author of Fighting for Enterprise Success
The problem of late payers arises because of no proper or adequate supply agreement, no guarantees or other security provided by the debtor’s directors , no proper or adequate internal credit control policy, and credit extended to a debtor with an already bad credit record. Late payers need to be pursued rigorously and persistently, preferably by phone or in person, with supply to be stopped during default. Do not overly trust in promises and excuses. It is never a good idea to agree to instalments. A creditor’s statutory demand will often work wonders in extracting full payment instead of a court summons.