Late payments are a constant source of stress and strain for Australian small businesses.
Research from Intuit reveals that small businesses are left an average of $13,200 in the red by late paying customers. This can have a serious effect on cash flow. Not only that, but small business owners end up spending an average of 12 days a year chasing these late payments.
While it’s up to customers to pay their bills on time, there are a number of tactics small businesses can implement to prevent late payments from happening in the first place.
1. Establish very clear payment terms up front
As a small business owner, it’s paramount you not only have a clear payment policy, but your customers understand it. Make your payment terms clear and noticeable on your invoices and always be as specific as possible. Instead of using general phrases such as “due in two weeks” state “invoice due to be paid in 14 days from [date].” That way there is no ambiguity or room for misinterpretation.
It’s always easier to follow up debts when you’ve been really clear about payment terms up front. You can consider including statements such as “I’m unable to continue with any future projects until outstanding debts are paid,” in your follow up correspondence. If someone has not paid their invoice, don’t feel obligated to keep undertaking work for them.
2. Establish a late payment fee
Part of your payment terms should always include late payment policy. This informs customers that a late fee will be added to their bill once it reaches a certain time frame past their due date. This is a good way to ensure on-time payments, as customers won’t want to owe more money than necessary.
For example, as part of your terms, an extra 2% penalty could be incurred after 30 days, increasing to 3% once the invoice is 60 days late.
3. Ask for a down payment or staggered payments
Late or non-payments can be the end of some small businesses. The research from Intuit also found 27% of small businesses that don’t insist on upfront payments have been forced to take loans or use credit to pay suppliers and wages.
A good tactic to avoid waiting around for large payments once a job is complete is to require a down payment ahead of the work commencing. This is especially helpful if the job is large, time-consuming or costly to complete and, gives you the peace of mind you need to concentrate on the task at hand.
Before starting work request your customer pays 50% up front, then once work is complete you can issue an invoice, or take instant payment, for the remaining 50%. The percentage can always be negotiated depending on the scope of the project, but remember to update your payment policy to reflect what has been agreed.
Requiring a downpayment will also deter any sneaky would-be customers who had no intention of paying at all!
4. Offer early payment incentives
Conversely, you could offer your customers an incentive if they pay early or on time. This could be a percentage off the total bill, or a discount on their next purchase, or a freebie of some kind.
For example, if your payment terms are 14 days, you could offer any customers who pay within the first 7 days a 3% discount on this bill or the next. By offering this incentive, you could see payday coming a little early, which goes a long way to help you balance your books.
As with your late payment terms, this can be adjusted depending on the size of the job, as well as the strength of your relationship with that customer.
5. Make it easy to pay
Consider offering multiple ways for your customers to pay you. There are a wide range of simple and affordable invoicing tools and cloud accounting platforms that make the whole payment process easier for everyone. Instead of emailing an invoice and hoping for the best, set up online payment options such as PayPal or credit card payments.
Enabling customers to pay in a way that suits them means that they are more likely to do so on time.
By accepting instant payments, you can be paid as soon as the work is completed and not worry about chasing late payment.
Late payments can seriously affect a small business’ cash flow. Being left out of pocket reduces your ability to pay your own bills, pay your staff and invest in things like new equipment. As a result, it will be harder to grow your business.
So instead of spending precious time following up bills, get proactive! And if the worst comes to the worst, even though debt collection can sometimes be difficult, just remember your customer may be late paying you because someone is late paying them, and they will probably appreciate the opportunity to talk to you and work out a solution. It’s worth putting thought into how to ensure you get paid on time. Your business depends on it!
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About the author
Anna Fitzgerald is the Group Head of Corporate Relations at Prospa. She focuses on media relations and driving our government, public policy and regulatory agenda. Prospa is Australia’s #1 online lender to small businesses. Prospa understands small business owners need faster finance solutions so that they can make timely decisions quickly and seize opportunities with confidence.