This content was last reviewed in November 2023
When a customer doesn’t pay, they’re hanging on to money that is rightfully yours. Chasing after debt can be stressful as a small business owner, and unfortunately with a third of payments to small businesses being late, it’s an all to common occurrence.
If you’re unsure where to begin, we’re here to guide you through the questions you might have about the debt recovery process.
What are the first steps I should take to deal with late payments?
Debt recovery can seem complex, but you should have a routine system in place to tackle any late payments as quickly and easily as possible. Follow up non-payments with a letter, an email and a phone call. Making contact can help remind customers to pay, maintain a good working relationship and avoid you chasing debt. However, you should be prepared to act sooner if you are owed a large amount, or if you’re concerned about the customer.
Ideally, it’s good customer service to call the customer before the payment due date to make sure it has been received and there is no query, especially when it’s a large payment. Where payment has not arrived, make immediate contact. You may need to be assertive about what you expect and when you expect it, and make the consequences of non-payment clear. Follow up promises to make sure they’re met.
My client consistently pays their invoices late – what should I do?
If a customer persistently pays you late or makes excuses, check them out and consider whether you’re prepared to continue supplying on credit terms. It may be better to lose an order, or even the customer, than supply goods, not get paid and suffer a bad debt. When that happens, you lose the goods and the money you’re due. At a net profit margin of five percent, recovering a bad debt of £1,000 will require additional sales of £20,000!
Needless to say, you should always be polite, professional and persistent - do what you say you’re going to do when you said you were going to do it. Over time, it’s also good practice to try to get customers to pay by electronic transfer or Direct Debit (BACS) to avoid having to wait for the cheque to arrive.
How can I manage my cash flow to deal with late payments?
Of course, even with the best planning and the most insistent activity, some customers may still fail to pay on time. This unfortunate reality means that businesses must carefully consider cash flow, and ask themselves if they have sufficient finance available to meet any commitments as they fall due. A regularly updated cash flow forecast to ensure you stay within your financing facilities is always a recommended. It’s a good idea to keep checking whether your customers may have been having financial difficulties that might make them pay you late, or not at all.
An effective business will plan its cash flow requirements carefully, allowing for differences in the payment terms received from suppliers and those given to customers. You should look to regularly update the cash flow forecasts to ensure you stay within your financing facilities. Monitor your plan as much as you can so you can spot any variances.
My cash flow is being impacted by late payments – what can I do?
If you think you might have a cash flow problem, talk to your bank immediately. The earlier you discuss this with them, the earlier they can assist you with what options are available to you. If you can’t pay a supplier on the due date, talk to them as soon as you know you cannot do so. Again, earlier communication allows for all options to be explored and gives more of a degree of flexibility.
Don’t forget, early communication is key – if you avoid talking to suppliers, your bank and other parties, you might find supplies or finance have been withdrawn or legal action has started and things will quickly escalate.
What steps should I follow to recover money owed to my business?
Dealing with late payments is something no business wants to deal with. Here are some best practices you can follow to give your business the best chance of reclaiming any debt:
- Make sure the invoice details are accurate before you consider acting
- Contact your customer is writing that you will be exercising your statutory right to claim interest (at eight percent over the Bank of England base rate), and compensation for the debt recovery costs under the Late Payment legislation. You should also advise them that you will be taking further action if necessary, which may be enough to prompt payment.
- If they fail to pay, stop supplying any further goods or services until you receive what you are owed. If your product or service is important to your customer, they may be more inclined to pay.
- Consider the commercial reality. If your customer is insolvent, or has no available funds, further action is unlikely to help.
What legal support is available for my small business?
There are some cases when everything seems to fail and you just can’t get paid. You’ve done all the right things, followed best practices, and the money has still not arrived. The longer the debt remains unpaid, the more likely it is to turn into ‘bad debt’ and damage your business.
Legal action is always an option. Dealing with debt when you’re a small business owner or self-employed can be daunting, especially when you’re not an expert. It also involves a lot of time and effort, which takes away from you running your business. A debt recovery service, like FSB Debt Recovery, gives you all the tools, resources and support you need to take control of your debt and get paid.