How to Handle a Late Payment
You will learn
- What qualifies as a late payment
- How to record your interactions with your customer
- Tips for charging interest on a late payment
A late payment from your customer can really disrupt your cash flow, and it is best to avoid them at all costs. However, we know that it is not always possible, so with help from Scott McLay from Sage, we are going to talk you through how to handle a late payment in your business, and give you our top tips for getting paid.
There are lots of reasons that your customers or partners can give for not being able to pay you on the date you agreed. Whether that be your customer withholding payment before they have checked the quality of your product or service, or an issue in your partner's supply chain causing unforeseen problems.
No matter what the reason, staying on top of a late payment is key so as to be sure things do not get confused or lost in the disruption. Most businesses will have payment terms and a payment due date on their invoice. Therefore, a payment is generally considered late if not received by this date. However, if you have not already agreed when the money will be paid, the law says a payment is late if it has not arrived 30 days after your customer gets your invoice, or after you have delivered the product or service.
Image credit: Sage UK
How to Handle a Late Payment
How you handle a late payment can often have a huge impact on how quickly the issue is resolved. If you are able to make a personal connection with the individual or business contact responsible for the payment, things will progress in a more pleasant and professional way than if you do not have a good relationship established.
Stay Calm and Stick to the Facts
It can be frustrating, but you will need to be persistent and remain calm when interacting with your customer about their late payment. When you are communicating, make sure you always reiterate the facts. In your contract or invoice, you will have set down exactly what product or service you will provide, as well as the total fee and agreed upon payment date. If your customer has failed to meet their part of your agreement, you will need to remind them, politely but clearly, of that fact.
Record, Record, Record
Make sure you keep a record of each communication you have with your late paying customer that you can refer back to. If you are sending emails to them, you will automatically have a dated record of all your interactions, but if you are in contact via the phone, make sure you make a note each time you speak with a description of the conversation that took place.
By keeping records, you will also be able to see if that person has a pattern of late payments with your business, and you can use that to inform your choice as to whether to work with them again in the future. If you do continue your business relationship with them, you will be aware of their history, so if a payment is missed again, you will be able to contact them straight away and chase them for your fee. Although, if it becomes habitual, you might need to consider terminating that relationship entirely.
Consider a Payment Tracking System
Often, a payment could be missed because you actually forgot to send an invoice in the first place – with all the other things you have to juggle in your business, human error can sometimes take over. You might want to consider using a payment tracking system to remove that possibility, just make sure you do your research first and find a system that does exactly what you need it to.
A payment tracking system gathers together all of your payment information in one place so that you can easily access and manage your invoicing. Depending on the system you use, it can flag up when payments are overdue, calculate how much VAT you need to pay, and some can even integrate with HMRC’s new digital tax system to make doing your taxes much easier. A payment tracking system can save you time, and keep your sensitive data safe.
Charging Interest on a Late Payment
If your customer does not pay you on the contracted date they agreed to, you can start to claim interest on that payment. Lots of small business owners do not choose this route for fear of upsetting the relationships they have managed to build with their customers.
However, charging interest on late payments can be a good incentive to make sure your customers always meet their payment date. It is recommended that you always charge interest on late payments, but you will need to make sure that you make it very clear that you intend to do this in the contract between you and your customer. You need to state what the interest rate will be, and when you will start adding it on to their outstanding debt.
Your legal stance
If your customer really will not pay, you can take legal action against them, though hopefully it will not get to that point, as legal proceedings take time and money to see through. It is worth getting in touch with your customer one final time before heading down this road with what is called a “letter before action”. The letter lets your customer know that if they continue to ignore you or not pay their bill, you will be taking legal action against them. Once they have received the letter from you, they should acknowledge that they have received it within 14 days, and then it can take between 30-90 days to get your payment to you, depending on how complicated your claim is. It is also a good idea to get a lawyer involved at this point, as they can better advise you.
A late payment can have a knock on effect for the rest of your cash flow, so you need to have a good system in place for handling them. Make sure you communicate with your customer and rely on the facts. Record all your communications and consider using a payment tracking system to monitor all the payments coming and going in your business.