Updated 31 May 2022
If clients or customers don’t pay you on time, or if you're always chasing overdue invoices, your business can struggle. To maintain a healthy cash flow and avoid insolvency, ensuring prompt payment of debts can be as important as making sales. This is why every business needs to learn the vital survival skills of debt recovery and credit control.
One payment a few days late may not seem like a big issue for your business. But it’s easy to fall into the habit of letting payments miss their deadlines. The upshot is that your business does not have the cash in the bank it expects to have at any given time. At worst, it can mean that a business that is thriving in theory can find itself cash-poor and even insolvent.
Unpaid debts also hamper your ability to invest in the future, as well as (ironically) your own creditworthiness with other lenders, making it harder to obtain loans. Time spent chasing bad debts can also detract from the business and make it harder to win new clients. You may even have to write off debts – meaning you’ve worked for nothing.
Customers could be late paying for any of a number of reasons. Your task is to work out which it is in each case, and address it without harming your working relationship.
A big client may assume that you need it more than it needs you. This may make them lazy about paying you on time.
Solution: Nip this in the bud early on, before you become too reliant on that client. If they persist, find another big client who won’t let you down.
Late payment can be a warning sign about the financial health of your customer. If they’re struggling to keep afloat or have larger creditors pressing them for payment, they might avoid paying your invoice until they have more cash.
Solution: Stay in regular contact so you have plenty of notice of any possible delays (and to ensure they can’t ‘forget’ about you).
If your payment terms aren’t clear from day one, it could cause problems later and lead to bad habits.
Solution: With every new client, make the payment terms explicit in a friendly but firm way, and demonstrate that you’ll chase late payments.
Time is a precious commodity when you’re running a small business, and chasing payments may be far down your list. It’s therefore easy to let it slide.
Solution: Make debt recovery a regular duty of one of your team, such as your accountant.
Naturally you want a good, positive relationship with customers and partners. This may make you reluctant to ‘rock the boat’ and pester them for money.
Solution: Be bold! It’s not rude to chase money that is legally yours. Your clients will respect you more for sticking up for your business.
It’s not necessarily your customer’s fault when debts go unpaid. It could be your invoicing and payment systems. Essentially you want to make it as easy as possible for people to pay you, so invoices need to be clear and the whole process needs to be streamlined.
Solution: Check all the basics, like PO and order numbers, and make sure you understand the invoicing dos and don’ts of the companies that you’re invoicing. You may want to take a look at one of the many invoice templates that are available online, to establish a good format.
There are a few options to explore if you’re having difficulty with unpaid business debts.
It might sound obvious, but a written letter (hard copy, not an email) can have the desired effect of indicating that your patience is running out. Keep it civil but firm, emphasise the urgency of payment, and ask them to respond as soon as possible to discuss the issue. In many cases, this will be enough to prompt a slow bill-payer into action. If this approach doesn't produce results, you can move on to the next steps.
This option involves using a trained, impartial expert in business disputes. A professional mediator will charge a fee, often based on the amount you’re owed, but this is usually less costly than a solicitor.
If mediation doesn’t work, you may need to take the case to court. You can do this online if the debt is less than £100,000 and owed by no more than two people or organisations. A county court will hear your case and, if it finds in your favour, it will then order your money to be paid. The county court can also order the debtor to pay if they refuse to respond to your claim.
This process used to be known as taking someone to the 'small claims court', but there is actually no special court for small claims (i.e. claims of under £10,000). A county court judgement is able to rule on any size of debt you may be owed.
A debt recovery service (which may be a kind of solicitor, a type of accountant or a team combining the two) can chase down late or withheld payments for you. Although their fee may take a hefty slice of the money, it’s better than not being paid at all.
Recovering debts can take several months or even longer. Firstly there is the period of time set out in your payment terms, which is usually around 90 days. This gives you time to sort things out with your customer before taking any further action. After this, it really depends on the method of recovery you choose.
With mediation it’s a matter of finding an agreement that works for both parties, which could happen very quickly or may take considerable time. Your mediator will probably try to establish some middle ground, so you can receive the money owed in part payments over a set period.
If you need to take court action, it can be quite a lengthy process. A case can take up to 30 weeks to go trial.
A debt recovery expert can ensure you get paid your outstanding invoices quickly, but only once they have been through their own processes. Ask them up front how long these will take.
To ensure you don’t have to worry too much about late payments and debt recovery, consider these mitigating steps.
However exciting a new customer might seem, do due diligence on them. Take a look at their company figures and financial status to see if they’ve faced any problems.
If you agree your payment terms clearly from the start, everyone will know where they stand. Make sure the terms you agree are a good fit for your business.
Here’s where proper organisation and customer knowledge meet. Good credit control means you only provide credit to customers whom you know are able – and willing – to pay on time.
If you’ve got a positive rapport with your customers based on trust and mutual understanding, you can encourage them to adopt good habits when it comes to settling invoices.
Don’t sit and brood about unpaid invoices or let frustration build up. Take action as soon as a payment is late, while staying polite and professional.
It’s a good idea to deal with late payers straight away otherwise it might become a regular habit. This is especially important if you rely on a small group of customers.
Why not incentivise timely payment? Perhaps consider a small discount for customers who pay early.
No small business is immune from late payment and the headache of debt recovery. That’s why it makes sense to have a contingency plan. Make a list of your key priorities – the things you need to protect and maintain to keep trading. Explore sources of credit that could tide you over until your clients pay up.
Last but not least, make sure your accountant is equipped with the tools they need to chase unpaid debts on your behalf.