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 mess up your cash flow, and it’s best to avoid them at all costs. But, we know that’s not always possible, so with help from Scott McLay at Sage, we’re 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’ve checked the quality of your product or service, or an issue in their supply chain causing unforeseen problems.
No matter what the reason, staying on top of a late payment is key, so things don’t 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 haven’t already agreed when the money will be paid, the law says a payment is late if it hasn’t arrived 30 days after your customer gets your invoice, or after you’ve 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’re 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 don’t have a good relationship in place.
Stay calm and stick to the facts
It can be frustrating, but you’ll need to be persistent and remain calm when interacting with your customer about their late payment. When you’re communicating, make sure you always reiterate the facts. You’ll have set down in your contract or invoice 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’ll need to remind them, politely but firmly 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’re sending emails to them, you’ll automatically have a dated record of all your interactions but if you’re 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’ll also be able to see if that person has a record of late payments with your business and 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’ll be aware of their history, so if a payment is missed again, you’ll be able to contact them straight away and chase them for your fee. If it becomes habitual though, 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.
Your payment tracking system gathers together all your payment information in one place that you can easily access and manages your invoicing for you. Depending on the system you use, they 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. They can save you time, keep your sensitive data safe, and take out that
Charging interest on a late payment
If your customer doesn’t pay you on the contracted date they agreed to, you can start to claim interest on that payment. Lots of small business owners don’t choose this route for fear of upsetting the relationships they’ve 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’s recommended that you always charge interest on late payments but you’ll need to make sure you make it very clear that you intend to do this in your contact with 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 won’t pay, you can take legal action against them, though hopefully it won’t get to that point, as legal proceedings take time and money to see through. It’s worth getting in touch with your customer one final time before heading down this road with what’s called a “letter before action.” The letter lets your customer know that if they continue to ignore you or not pay their bill, you’ll be taking legal action against them. Once they’ve received the letter from you, they should acknowledge they’ve 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’s also a good idea to get a lawyer involved at this point as they can better advise you and judges will look more favourably on your case if the dispute ends up going to court.
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.