Every day, we hear from business owners who have to cope with long payment terms and late payments. Periods of market uncertainty – for example, the recent Eurozone crisis and Brexit – often trigger a push by large corporate to lengthen payment terms. Everyone wants to hold onto cash longer, and get paid quicker.
So here are our top 5 tips to help you deal with late payment.
It may be a cliché but it pays to have a good relationship with your client or a representative of that business. That way it'll be easier to sort out payment terms and chase any outstanding payments. Just always make sure you don’t let any frustration at a late payment sour these relationships. Small business owners can't risk offending their biggest and most important client by ringing up and being terse with the person on the other end of the phone.
By agreeing terms in advance, you can pre-empt cash flow fluctuations and decide on something that suits your business growth plan. Consequently, you'll be better prepared. Of course, some blue chip customers will insist on extremely long payment terms that are standard across the business.
If entering into a relationship with exceptionally long payment terms – 90 days is not unusual with supermarkets or high street retailers, for example, a common tactic for improving cash flow is to start a relationship with an invoice discounting facility, or negotiate a price discount in exchange for faster payment terms. This way, you trade some of your profit margin for prompt, reliable payment, but do be careful to assess different options.
Many large customers will ask for rebates for early payment of invoices – if these are 5% or more, you will need to weigh this up with the cost of monthly funding – as this might be a cheaper alternative.
Anything that slows the payment process or distracts from it could lead to serious problems. Organisation is paramount.
The faster that the billing department generates invoices and sends them to the customer after a product or service is delivered the sooner payment will be received. As obvious as this may be, too many companies will perform such work in batches and it may take them a week or more to invoice their customers. Electronic invoicing and payment tools can further speed up the payment process.
Invoicing errors are a frequent contributor to long payment cycles. Quoted prices might not match up with master data, and invoices might not include the all-important purchase order number, which leads to an invalidated invoice that might be disputed by the customer. Analysis of such errors can uncover the failures that are driving mistakes. Simplifying payment terms and controlling other sources of complexity can limit the opportunities for error.
Obviously you need to be paid for the service/product you have provided so make sure that you respond swiftly and efficiently if a payment becomes overdue. Remember, heavy-handed attempts at collection and enforcement (especially by third parties) can often backfire on your relationship with your client.
Especially for small companies with a relationship with large corporates, this kind of negotiation can be very delicate. Usually, the problem is down to an error in some labyrinth department that your regular contact has no access to within a huge matrixed organisation. Often you'll be dealing with the procurement or buying department and have less of a direct relationship with the accounts payable department. Try to solve things through your regular contact, rather than going over their head and encourage them to talk to relevant staff in payments.
One of the worst steps a small business can take in this situation is to attempt enforcement action, for example, by trying to levy statutory interest on an overdue invoice. That can often turn the finance department against you and they may switch to another supplier rather than deal with the hassle.
A recent trend for large corporations is to implement online vendor portals where suppliers can log on, submit their invoices, and check the status of upcoming payments. It’s very important that suppliers know how this system works and understand the right process for accepting purchase orders, issuing invoices, and inputting correct payment bank account details.
Often these portals are designed to cut out human interaction and help desks might be difficult to reach (and often based overseas). So it's important that you take the time at the start to understand the protocol, avoiding any delays when you're really dependent on receiving the cash to meet your own bills. No one likes a last minute dash.
To help you deal with late payment, develop a good relationship with your client, preferably with a particular person, and agree payment terms in advance so you can better manage your cash flow. If your customer insists on long payment terms, have a backup plan like negotiating a discount in exchange for faster payment or organising some sort of finance to help with lumpy cash flow, like invoice finance.
It may seem an obvious point, but invoicing correctly and promptly, and chasing payment immediately when it's overdue, can help avoid a lot of issues. Lastly, if you have to use a vendor portal, make sure you know it works and that all your details are correct.
As mentioned, long payment terms arise as a natural consequence of being a supplier to a large corporate. Waiting on long payment terms will often slow a business’s growth, especially in fast moving industries where waiting for three months for a big client to pay can be a big drag on their ability to take on new staff, or move up the ladder, dealing with bigger and bigger clients. Long payment terms often mean that a business is dependent on some form of external debt finance, or shareholder capital.
Of course, like most advice, it is easy to offer and sometimes hard to follow – all businesses can benefit from being a little better organised, a little better managed or having a better relationship with suppliers.