Lee Murphy of Pandle, a cloud bookkeeping software for small businesses, looks at how to tackle the late payment culture.
It can be a daunting time; having completed a job to a high standard, paying meticulous attention to customer care, you are left waiting weeks or even months to get paid.
The number of smaller construction sector firms at risk of collapse because of late payments is on the rise. According to recent research by the Prompt Payment Directory, many business owners cannot afford to pay themselves a salary because of the financial strain caused by late payments.
It is a national problem highlighted by the collapse of construction giant Carillion earlier this year. The company was revealed to have spent £952m on local suppliers in 2016, relying on an extensive network of small firms who were forced to accept payment terms of 120-days.
In the wake of its failure, Carillion is believed to have left up to 30,000 small businesses with unpaid bills, having a knock-on effect on their ability to continue trading.
Those businesses have been jeopardised simply because they had not been paid by a client many had presumed reliable and solvent.
The Prompt Payment Directory gives some insight into the effect Carillion’s collapse has had on the construction sector. Of the 400 small construction firms surveyed, 74% reported to have been on the brink of bankruptcy or liquidation or said they could be soon due to late payments. That figure is up by 30% on the previous year.
Dealing with late payers may seem a challenge, particularly if you are a one-man-band working for a corporate client, but it needn’t be so. By taking steps to ensure your customers know when and where to pay you, you can instantly reduce how long it takes for invoices to be settled – after all, not all late payments are made with cynical intentions.
All too often it is easy to focus on doing the day job and keep work coming in and leave the business of chasing down invoices to another day. Yet business administration, from sending out bills to forecasting cashflow, is as much a key component of a healthy thriving business as having a strong workflow.
There are plenty of tools available online, many of them free of charge, that will help you get organised and keep track of who owes you what and when. Many of them are event free, such as Pandle, which can automate the process of chasing and reminding customers for you, something that we see invariably having an immediate impact getting debtors to pay more quickly.
Creating a payments policy that can be agreed up front with clients will help head off many problems before they arise. If you have a late payments policy in place, then you have the authority to enforce the rules.
Asking clients to sign a payment policy at the start of a contract will ensure that they are aware of your terms and conditions. Include specific payments dates – these may vary depending on what business you are in – as well as details of charges and interest for late payments.
Make sure your invoice includes all the correct information – help your clients to pay you by telling them how and where you want to be paid.
If you are taking on a large job that could span months or ones that involves you incurring costs up front, make sure you ask for a deposit or phased payments – no matter how reliable this customer has been in the past.
It’s well worth considering a deposit to make sure a project goes through ensuring you at least get some money if the work falls through. Likewise, phased payments for longer-term projects will ensure a healthy balance sheet.
Bonuses and penalties
You may wish to include details of penalties for late payers in your payments policy. This could be a financial fine, or you may want to refuse any repeat business until a payment is made.
You can encourage early payments by including bonuses, such as a discount or a free follow-up visit for customers who settle early. Not only does this boost your business coffers but builds customer loyalty.
Reminders and non-payers
There is nothing worse than calling a client to demand payment only to find you have the wrong details or perhaps missed out their purchase order number and they are using this as a tactic to keep delaying its payment. Be clear of your facts before you begin sending reminders and demanding payment.
Remember to stay professional and courteous; being abrasive and rude will not encourage a client to pay up.
If a client continues to refuse to pay after reminders are sent, you may want to refuse any new work until bills have been settled. Remember to keep a note of non-payers, this could help you in several years to come.
Dealing with non-payers
If you hate chasing invoices, consider selling your invoices and getting someone else to do the chasing for you. This is called ‘factoring’ – it comes at a high cost, but it does mean you get paid on time and don’t get involved with chasing lots of invoices.
Any decent tradesman wants to keep a good relationship with their customers, but chances are you will have to get tough with non-payers at some point.
If you have people who won’t pay, then lots of phone calls and emails are the starting point and, clearly turning up at their house for domestic clients works well. After that it is legal channels, which sadly can be slow moving and involve more cost.
If you are clear with customers about your payments policy and set up an automated reminder system that prompts them of when and where to pay, you will immediately cut how long it takes for invoices to be settled. In doing so, you will be left to focus on building your business, something that is good for you and your customers.
– This article originally appeared in the October 2018 issue of ECN.