Of cash flow interruptions that SMEs don’t have direct control over, late payments from customers are one that every business has to wrestle with. A single late payment might just be an inconvenience, but over time these incidents can seriously undermine the long term viability of your business.
Even minor cash flow interruptions can interfere with your ability to pursue growth opportunities, pay employees on time, pay your own suppliers, and cover your own fixed operating costs. As we discussed in a previous article, 70% of small business owners surveyed in Australia have reported that late payments have negatively impacted their profitability and cash flow, and that more large clients are paying late than ever before.
Learn about your customers
Few businesses go to the trouble of checking a client’s credit history, and that can turn into an expensive mistake. Businesses need to convert leads to sustain and grow their operations, but that doesn’t mean you should necessarily agree to do business with anyone who comes through the door. Untrustworthy clients can quickly become very expensive.
If you run a check on potential or current clients, and find that they have a history of late or missed payments, you’ll be able to take measures to protect yourself and to minimise risk to your business.
Invoice early and often
Don’t rely on single large invoices when projects are completed. Instead, invoice clients regularly for partial amounts. More paperwork might sound like an unnecessary complication, but it can make a big difference. If a client misses a payment deadline, you can mitigate your losses by stopping work instead of finding yourself in a non-payment situation after completing the entire project.
Furthermore, smaller sums will be easier to accommodate for a client at any given time, which means you’re more likely to be paid in a timely manner even if a client is trying to deal with their own cash flow problems.
Write thorough and binding contracts
Remarkably, many SMEs don’t have clear and legally binding written agreements regarding non-payment with their clients. Always ensure that your contract clearly spells out exactly what will happen in the event of non-payment. That means delineating how late a payment can be before work is halted, and establishing agreements regarding late fees and accrued interest on unpaid invoices.
Ideally, you should ensure that it’ll be more expensive to pay late than it would be to borrow money from their financial institution to pay you. By doing this, you can make it unattractive for clients to build up trade debt with your business, even if you choose not to terminate a late client’s project. To ensure that your contract is legally binding, it’s also a good idea to work with a legal professional when creating this document, especially if you’re working internationally.
Use payment plans
In many cases, very large clients won’t be willing to sign contracts that don’t grant them very favourable terms, especially if they know that your business will rely heavily on their business. Fortunately, that doesn’t mean that they explicitly intend to be delinquent on payments.
A great way to protect yourself when you have that minimal goodwill without a lot of leverage is to use a customer payment plan financed through your financial institution. You’ll be paid a lump sum right away, and your financial institution will collect payment from the client themselves, effectively removing you from the process. Not only will you be paid much more quickly, you’ll also be able to maintain a much smoother client relationship since any future payments will be completely out of your hands.
Set up contingency plans
In some unfortunate cases, you’ll still be forced to deal with late payment issues no matter how well you’ve managed your clients. To make sure that you don’t suffer a cash flow interruption as a result, there are a few contingencies that you can pre-emptively set up.
Free standby finance facilities
Standby finance facilities are loans that are negotiated in advance, allowing businesses to draw on them at a future time without having to go through the approval process. This can help you get fast access to a significant amount of capital in the event of a cash flow emergency.
Invoice financing or invoice factoring allows you to exchange an outstanding invoice at your financial institution for most of its value up front. Your financial institution will then pursue payment from your client on their own.
As late payments become a growing problem around the world, SMEs need to take preventive steps to protect their cash flow and ensure their ability to operate smoothly. By thinking ahead and actively managing these risks, you can not only survive, but also support your business’ growth by giving your business an advantage over poorly prepared competitors.