How to deal with reluctant commercial payers
Posted on 23rd September 2021 at 18:38
From Our What'sUp? Workshop 22 September 2021
It’s a perennial problem for many businesses, and a particular one for small companies where cashflow has to be carefully managed: too many clients fail to pay on time, and sometimes not at all.
This frequently leaves a hole in the company cash reserves and makes it a real headache for the business owner because both of the following are true:
We need the payment as agreed
We want to keep our clients happy and not lose them
So in the interests of maintaining healthy relationships and healthy bank balances (or at least a positive cashflow) the Workshop Panel looked at the possible tools and techniques available to deal with a reluctant payer along with some tips on what works for them personally.
We want to land the contract and get cracking on the work, but there are a couple of simple steps to take before making that commitment to a contract:
How much credit are you prepared to give your customer? If they fail to pay or are unable to pay for some reason outside of your control, how far are you willing to bankroll your part of their project before you say “enough is enough”? Putting these terms to them up front and getting them accepted means that you have that lever to apologetically stop providing service if invoices remain unpaid, without it being an acrimonious argument.
Check what payment terms they agree. You may be offering a 30 day payment term, but their “standard” terms may state 60 days. In addition, there may be some clauses that they add to determine the value of your work and challenge your invoice within a certain period. I’ve had that happen to me, but since their challenge came after the due date, they were unable to use that reason and had to pay in full. Note that when a client agrees to your offer, any terms they use as part of that agreement become part of the contract if you just accept the last terms on the table, so check first! If you haven’t got your own terms, then there are a number of boilerplate templates that might be close to something you can use. These can be found through options such as Business in a Box (https://business-in-a-box.com), as part of a Chamber of Commerce membership or through the Federation of Small Businesses (https://www.fsb.org.uk), as some examples – others are available.
Amazing how many people miss this one, but be clear about what you offer and how much it will cost. So many companies fall foul of this and believe that by making it all a bit woolly, you can make it up as you go. Wrong! It’s usually the customer who wins this one! Allow your sheepdog to take a break from trying to round up the scope of works and sort it out up front!
If you’re purchasing equipment, then consider the impact on your own cashflow. If you supply a piece of equipment that is not paid for, it still becomes the property of the client (under the Sale of Goods Act). However by including a “retention of title” clause in your upfront agreement, it will remain your property until paid for. However if it has been incorporated into something else in the meantime, then even under a retention of title clause, it’s not going to be feasible to recover this as a resaleable item.
If you’re unsure about the customer’s credentials, you could ask for an upfront payment on account. Whether this is acceptable may depend on whether the client is receiving something tangible in return, such as physical items.
Consider a quicker payment frequency, or a clear payment schedule. That way you can catch any late payments and spot them before the credit racks up.
Send the Invoice
Often a service-based business is keen to provide the work, but less assertive when asking for money. It’s only natural, as it can almost feel embarrassing to ask to be paid! However, don’t let the reserve get the better of you – you had an agreement so use it.
Be very clear what you’re asking for and why. This can often be linked to the scope of works you agreed up front (you DID agree one, didn’t you?)
Anticipate that the client might have some difficulty in paying, and encourage them by citing the Late Payment of Commercial Debts Regulations (1998). Unless you have a contractual agreement in place about late payments, then this can be brought in for UK-based contracts. Because it’s an Act of Parliament, it automatically applies as a default position.
As a creditor, it outlines the terms of compensation and interest for late payments or an invoice to be made to you, depending on the date at which you receive the payment. There are several online calculators which can help, since in the vast majority of cases the delay is in days rather than years. Each late invoice gets treated separately, so a company that has racked up several late payments, might find the compensation payments build up! A good suggestion is to identify this regulation on your invoice, to avoid any doubt that you know the tools available. Hopefully to avoid the problem in the first place!
Many customers have their own quirky internal procedures, and in the event of a delay, the reasons are provided why they can’t pay you. It’s not your problem what their own foibles are, but it becomes your when they don’t pay on time. Take the time to find out what they need for their process to work properly, and make sure you provide it. Not only will that remove the opportunity for the customer to delay, but it demonstrates that you understand and want a good relationship with them. Frequent reasons are that the pay run only occurs on certain days – so make sure you get your full submission in time for that to happen – and some companies will only pay when they receive a full statement of account – help them out by sending one of those monthly or whenever you invoice, so they have the information to hand.
Chase the Payment
OK, so the payment isn’t late, yet, but you want to know if there is anything that might be outstanding. It’s human nature that we only pay for something when we absolutely have to, so tracking your invoice with a phonecall to make sure it is being processed and to confirm when you expect payment, not only ensures the visibility of your request, but it can also give an early indication if something isn’t quite right. Get this as a “Payment Promise”. The lucky side-effect of this is you become very familiar with individuals in the invoice processing department, and that relationship can go a long way to smooth the waters!
Should the payment not arrive as expected, don’t panic just yet; there could be a perfectly reasonable explanation (in their eyes anyway), such as illness of a key person, an unexpected failure of a system or maybe something outside of their control. Just call and ask nicely.
The Payment’s Late! What Do I Do?
Time to panic? No.
There are a number of options available, depending on how much you want this client, how much they need you and how much risk you’re prepared to shoulder.
If they have reached your permitted credit limit, stop work (safely) and politely inform them that as they have exceeded the allowance, they will need to at least pay something off. Remember this would have been agreed at the outset (but perhaps not taken seriously) so there’s no need for it to be acrimonious – just an execution of the contract. Be prepared for the arguments about why it’s unreasonable of you, though!
Apply the late payment legislation (or equivalent if agreed in the contract) from the moment that the debt becomes “late”. However the value of the final payment depends on the date when you actually receive the amount of the original invoice, so and illustration of the ongoing costs is a good idea at this stage – and you can “negotiate” to disapply it in this instance.
Factor out your invoices – there are fees, but you will be at least some of the outstanding amount, and you’re spared the stress.
Take the client to court. This is a nuclear option and likely to be long drawn-out and quite expensive in time to administer. You’re also unlikely to retain them as a client.
It’s more sensible to avoid getting into these problems in the first place.
The main way to ensure payments are made on time, is to have a strong enough relationship with your client and good communication, so you can work together – it doesn’t need to be a competition, but a collaboration.
You can also consider using a subscription service such as CreditSafe (https://www.creditsafe.com/gb/en.html) which can help you to track the behaviour of your client and supplier base, get warnings of looming problems and allows you to log missed payments against them. As this is likely to be reflected in a client’s credit rating, it may focus their mind a little, too.
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