This Is the One Question You Need to Ask Every Time A Customer Pays You Late
Late paying clients can put you in a terrible dilemma. You rely on their prompt payment for cash on hand and paying your suppliers, yet you don’t want to rock the boat by demanding immediate payment. Good relations with your customers are an essential part of retaining and winning more business, which makes you reluctant to threaten debt collection or impose late payment penalties for overdue invoices.
According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Payment Times and Practices Inquiry, late payments adversely impacted the mental wellbeing of 78% of small business respondents. And when asked about the flow-on effects for their business, 93% of respondents reported personal/family hardship.
So how to break through this predicament of not knowing what to do about late payments? You ask yourself this compelling question:
“Are your clients treating you like a bank that offers interest-free loans?”
Approaching late payers with this mindset can help you take the emotion out of the equation. It may help you focus on clearly communicating with your clients about when they are expected to pay. Plus, you’ll stop worrying about what clients think of you when you ask for payment when it’s due.
Did you know?
Australian corporations pay invoices on average 26.4 days late – the worst in the world.
Source: Payment times review will identify Australia’s worst payers.
- 35% of ASBFEO Late Payments Inquiry respondents reported themselves at increased risk of insolvency/liquidation as a result of late payments.
57% of respondents needed to borrow or use credit cards due to late payments to their business.
Source: Working Paper 3: Analysis of Survey responses
While the ASBFEO inquiry discovered there is an alarming trend among large companies to extend standard payment times beyond 30 days, there is also mounting pressure on government and big business to improve payment times. During a November 2018 Address to the Business Council of Australia, the Morrison government announced the intention that companies with a turnover exceeding $100 million publish their payment information as part of a new mandatory reporting framework.
Also announced, large corporations seeking to win federal government contracts will be expected to adhere to the Government’s own pay on time policy of 20 days. This Supplier Pay On-Time policy requires non‑corporate Commonwealth entities (NCCEs) to payment terms that provide payment to suppliers of no later than 30 days for contracts valued up to A$1 million.
Of the Commonwealth agencies who participated in the Government Pay On-Time Survey for the 2016-17 financial year, they reported paying 95.9% of invoices within 30 days. A reduction down to 20 calendar days is mandatory for government agencies from 1 July 2019.
Practical tips for getting invoices paid
So as a small business owner, how can you get in on this push to discourage tardy payers? Here we look at nine strategies for protecting yourself while still maintaining a great relationship with your customers.
Clearly identify your payment terms
State your payment terms clearly on all order forms, quotes, invoices and contracts. Carefully check the terms and conditions and debt recovery options in contracts. A good understanding of your contractual obligations may prove valuable should a dispute arise over late payments. For assistance, go to the Australian government understanding contracts page or seek legal advice.
Communicate with clients early on
Don’t wait until your invoice is well overdue before you contact your customer. The earlier the intervention, the better, particularly as the holdup may be due to a mistake on your invoice or a processing error.
When you begin with a new client, make sure you both agree to the credit terms. Consider the option of including discounts for early payment, or penalties for late payments.
Follow a process
Develop a step by step timeline for communicating with customers about upcoming and outstanding payments – then stick to it. The ASBFEO recommends you send a reminder ten days before payment asking whether your fee is in the system. Once the invoice is overdue by one or two days, get in touch to check if there is a problem that prevented payment.
Be in touch at regular intervals, either by phone or email, for invoices that are up to 30 days overdue. Keep this process standardised and time efficient by using electronic invoices and payment reminders.
From there warn your customer about the next steps you will take if the invoice isn’t paid (these steps should be outlined in your terms and conditions). The first step may be to send a letter of demand, drafted by a lawyer, describing the payment deadline and the consequences of breaching this deadline.
Make payment easy
Offer a variety of secure payment options, including online payments, direct debit and credit cards.
Choose methods that meet the needs of both your customer and your business finances.
The increased uptake of online invoicing and electronic invoicing (e-invoicing) technology is delivering significant time savings at both ends of the transaction. ASBFEO estimates suggest the potential benefit of switching to e-invoices is about $28 billion for the Australian economy over ten years, with 1.2 billion invoices changing hands annually.
Ask for a deposit up front
Break the payment down into two or three instalments by asking for a deposit up front. The remainder is either due at completion or a specific timeframe/deliverable if it’s a long project. If you’re delivering stock, request payment on delivery so you can eliminate your risk of being left out of pocket.
Request a retainer
With the up-front payment of a retainer, you will be in a better position to manage your cash flow and have peace of mind.
It helps to remind customers of the impact of their late payments. Let them know that an overdue invoice will impact the payment of your contractors and suppliers. Also be clear about the effect it has on your business productivity and growth.
Understand your rights
When a customer tells you they can’t pay your invoice yet because they have to wait for their debtors to pay them, how do you respond? Understanding the laws that apply to debt protection will help you to be assertive when a customer tries to pull the wool over your eyes.
Know your customers
Prevention is better than cure, so it pays to enter any business arrangement with your eyes wide open. Thanks to standard credit-reporting practices that monitor credit conduct, you can arm yourself with an accurate picture of a company or individual before going into business with them.
Integrating credit reviews into your process, whether quarterly, annually or at regular milestones for a long-term project, can protect you from unfavourable surprises by alerting you to any changes in a customer’s financial health.
Running an Equifax SwiftCheck credit report is an easy way to determine the facts and figures of who you are really trading with. For example, if a business consistently pays invoices and bills late, you will be able to see this in the Invoice Payment History portion of the report. It’s a valuable potential indicator of adverse events.
Seeing the commercial credit information of a company you are about to do business with enables you to validate that they are real before you package and ship your order to a fake address. It also gives you the ability to manage any customers seen as high risk, and the peace of mind of ongoing monitoring.
The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.