6 ways that small businesses can address late payments with their clients
As a small business owner or side hustler, you work hard for your customers and you expect to be paid on time for your efforts. Having to chase clients for money is the bane of many entrepreneurs’ lives – not only do overdue payments affect your cash flow, it’s also unfair and frustrating to need to spend your time following up with late payers.
But the reality is that South Africa’s economy has been in poor health for a while, and the pandemic is adding to a cash crunch among many businesses and consumers. Whether your customers are large corporations, consumers or other small businesses, chances are that you have some slow payers among them.
The State of Late Payments survey from Xero found that 91% of small South African businesses are impacted by late payment of their invoices. Some 47% of respondents said they see cash flow and late payments as a threat to their business. This survey was released in December 2019 – so the picture in the midst of the national economic lockdown and the COVID-19 outbreak is likely to be even uglier.
There are some effective ways, however, to speed up payments without awkward conversations that might alienate long-term customers:
- Set clear payment terms and conditions
- Make it easy to pay
- Incentivise early payment
- Invoice on time
- Get the paperwork right
- Follow up
Let’s jump in and look at the detail.
1. Set clear payment terms and conditions
As you enter a new relationship with a customer, you should raise your payment terms and conditions during the negotiations or when quoting. If there is a formal contract, include a clause about the agreed payment terms, whether they are upon invoice, 30 days or 60 days. Also, put your payment terms in a prominent place on your invoice as a reminder. Setting a payment deadline is key to getting paid on time.
Of course, when you’re dealing with large corporations, you probably won’t get too much say in the payment terms. In this instance, it’s important to understand what their payment terms are and if they are acceptable for the time and materials you will invest in them. In some cases, you may decide it’s better to walk away than to need to wait 90 days for payment.
2. Make it easy to pay
Make it as simple as possible for your customers to pay you – let them use the channel that works for them, whether it’s paying by card, making a bank transfer, using cash or making a QR payment straight from a smartphone. Display the payment options clearly on your invoice, along with details like the reference to use for the payment; when customers pay by EFT, ask them to send a proof of payment.
3. Incentivise early payment
The reality is that many of your customers will be sitting at the end of each month with a pile of invoices to process and not enough money to pay them all. A good way to move your invoice up the priority list is to offer a discount for payment within 30 days or upon invoice. This discounted price could well be the usual fee you’d charge – and the bill without prompt settlement could effectively build in a penalty for late payment. But positioning it as a discount may persuade customers that they’re saving money when they pay on time.
4. Invoice on time
Most small business owners hate doing admin and it can be easy to fall behind when there’s paying work to be done. Yet invoicing promptly is the key to getting paid promptly. Remember to send out your invoices at the same time each month, when project milestones are reached or upon delivery, depending on your payment terms and conditions. If you are slow to invoice, people might think you don’t mind when you get paid.
If you deal with corporate clients, try to find out how their billing and payment cycles work. For example, if the cut-off is the 25th of each month, you won’t want to miss it and have your payment delayed by a month or more. Some accounting systems can automate the process from quoting to invoicing.
5. Get the paperwork right
Accurate invoicing is key to getting prompt payments from a small business’s clients – they won’t need to raise any queries or ask you to submit a new invoice. If you’re dealing with a corporate customer, it’s key to ensure you have a Purchase Order (PO) number and that you have submitted your invoice in the format and with the details they require.
Another tip for dealing with bigger companies is that they will have a separate team, handling payments – find out who the right contact is, so that you can send the invoice directly to them and follow up with them. That way, you can chase the right person for payment and avoid nagging your client contact.
6. Follow up
One reason that people or companies don’t pay on time is that they simply forget or miss the invoice. Don’t be shy to send an email or text reminder a day or two before payment is due if you invoiced nearly a month or two in advance. And follow up as soon as a customer has missed a payment deadline – it shows that you are serious about being paid.
The initial follow-up can be a friendly prompt – since the late payment could be a simple oversight. You can be slightly firmer (but still polite) in subsequent follow-up text or email messages. Include all the payment info in each message – the outstanding amount, the deadline, the invoice number and how to pay. You can also follow up with a phone call if the nudges get no response.
Running a sustainable business
Getting paid on time is the key to running a sustainable business. When clients don’t pay or constantly pay late, consider halting work until they catch up on their payments and consider moving them to a payment-on-delivery basis. Where possible, it’s also wise to seek a deposit when you will need to procure goods or services from a third party to deliver for a client. Establishing relationships with your clients and keeping the lines of communication open are key. It’s better to have a rapport where you know if a client will need to pay late so you can work around it.
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