Late Payment and Debt Management: How Do You Encourage Timely Payment By Your Customers?

A constant that I find in business coaching is that many micro-businesses struggle with late payments. The general experience is that taking a non-paying customer to court is not only very unpleasant but it is also expensive, distracting and time-consuming. Yet it is easy to practice effective debt management if you know how.

One of my clients has developed four steps to speed the payments he is due:

Watch your customers’ accounts

You must be able to distinguish between your customers who are struggling with overwhelming workloads, and those who choose to default on your payment as they spiral into insolvency.

·         The first sort will respond to help and encouragement so that their late payments can be softened with the addition of interest when they get round to paying you.

·         The second sort are cynically withholding your rightful payment to delay their own day of reckoning with bankruptcy. Your best response will be to seize whatever you can before their cash runs out.

So keep an eye on your customers, be interested in their business health and listen for trade gossip about them. By monitoring the size of your customer's debt against their current credit rating, you can decide whether to encourage them to clear their debts before accepting further orders from them.

Help your customers to pay

You must ensure that your invoices are effective: state your business name and contact details, note the quantity of each product or service supplied, state the price charged (with tax if charged) and show any non-standard settlement terms.

Presenting your invoice just before your customer's monthly accounting date will enable them pay the invoice immediately and not lose it in their in-tray.

Chase overdue accounts promptly

On the due date, send a polite letter or e-mail to remind your customer about their overdue payments. You can show your commitment to being paid by telephoning directly to the buyer, the managing director and the business owner.

Do record every letter, e-mail and phone call you make – both to track overdue accounts and in case you need evidence for later use in court.

In England, the Late Payments Directive allows interest to be charged at current bank rates on overdue accounts. Sometimes your polite hint to your customer will trigger them to pay up at the invoiced price rather than wait to incur interest too.

Discuss differences and negotiate outcomes

The UK Better Payment Practice Group have a range of helpful suggestions about the techniques you can use to trace debtors who might be difficult to contact. The shock of finding that they are still accessible can convince such customers to settle your bill.

Where debtors have a habit of contesting invoices, you might benefit from hiring an authorised mediator or professional arbitrator to judge the claim you want to assert. This approach can extract a fair payment from your customer without incurring court costs.

Debt collection agencies will purchase bad debts (at a realistic discount) saving you the time and aggravation involved in obtaining settlement. Often the agency will pursue their purchased debt vigorously so you should restrict this approach to one-time sales or where you have no interest in future sales from that customer.

When you choose to pursue legal action, you might ask the Insolvency Service whether your customer is already out of business. Then you will need to brief a solicitor or attorney and get them to help you approach the court for a Small Claims settlement and an insolvency order.

Using a payment procedure to manage your cashflow

Where my clients follow this sort of procedure for managing customer payments, the rigour and attitudes involved seem to influence the good customers to meet their promise to pay for the goods received. Equally this approach seems to frighten off the bad customers so their take their unprofitable business elsewhere.

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