Discounts for Early Payments

Finance professionals might start by considering offering a small discount to customers who pay early. This tactic can be expensive - it’s only really viable when you have the margins for it. For example, if you provided a 2% discount for payments made within 10 days, you might receive fast payments as customers try to take advantage of your offer. This might reduce your average profit by 2%, but increase the number of orders you get. If cash-flow is an issue, this can offer real benefits.

Work on a pro forma basis

For the uninitiated, pro forma invoices can be sent to customers to lay out the costs of goods or services before they have been delivered. Once the customer has agreed and paid the costs, the supplier will then provide the goods or services, after which a true VAT invoice must be delivered to the customer. This can totally eliminate late payments, as customers will have paid before they receive the goods or services that you supply.

It is important to note that proforma invoices aren’t actually invoices, and cannot be used for accounting purposes. Because of this, they should contain the phrase “this is not a VAT invoice.”

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Factoring

Factoring is an outsourced credit management service that helps companies maintain healthy cash flow. Factoring companies will pay you most (often 80-90%) of an invoice immediately after it has been raised (with a signed order), and will then collect payment from your customer directly.

You’ll need to pay factoring companies for two things: a fee for the service itself (which is usually between 0.5 and 3.5% of the turnover) and for the cost of “borrowing” the funds used. Additionally, some factoring companies additional protection, such as insurance against client insolvency or recovery services.

In addition to the costs of factoring, an important consideration is that it can put a strain on your company’s relationship with customers - factoring companies don’t have personal relationships with your customers and can be quite ferocious about getting their money - this can be negative for clients.

B2B: Ask customers if they have a PO system prior to invoicing

One small step SMEs can take to help minimise late payments from other businesses is to check whether their clients operate a purchase order system before invoicing. If you send an invoice and then receive an email 28 days later asking for a PO number, you are more than likely to receive the payment late. It may seem obvious, but it can be easy to forget and can cause delays in payment, particularly if the customer doesn’t alert you to the fact that a PO number is needed.

B2B: Late payment fees

Another option companies have is to charge fees to business customers who pay late. Since March 2013, businesses are entitled to charge statutory late fees and obtain reimbursement for your company for the reasonable recovery costs of the debt, if you do not get paid for goods and services on time (this is defined as “within 60 days for business and 30 days for public authorities”).

Obviously, this can be risky, as charging your customers could result in disputes and tarnish your relationships with them. On the other hand, even if you don’t intend to actually collect them, credit controllers are likely to deal with invoices more proactively if they see that there is a possibility they will be charged.

So in summary, not every suggestion in this blog is suitable for every company, but there are certainly options out there. When all's said and done, in the majority of cases, the most effective way of minimising late payments is to be proactive and persistent - pick up the phone and politely chase for payment, developing a relationship with your customers as you go. If a client says they are going to be paying late, find out why this has happened and work with them to ensure it doesn’t happen again when you next do business. You also need to be prepared to be firm with clients who repeatedly fail to pay on time - you aren’t obligated to extend credit to anyone. Of course, if doing business with certain customers puts your cash position or solvency at risk, it’s sometimes worth making some tough decisions.