Business Debts Damage SME Cashflow: How Do You Manage Late Payers Effectively to Keep Solvent?

Adrian Pepper

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Somewhere in the first three months of running a small business, most people find that chasing late payments is a fact of their life. It is unpleasant and expensive to take non-paying customers to court. What is more, the drawn-out process distracts you from building your business. As bad debts lead to reduced cashflow and eventual bankruptcy, I take care to teach my start-up clients these easy steps to avoid late or missed payments.

Know what you are expecting to be paid for

The foundation to minimising bad debts is to ensure that every invoice that you issue helps your customer to pay promptly. At the time of making a sale, find out when their monthly accounts are closed and when their payments are processed then you can time your invoice to fit their payments cycle.

Your invoice should show: your business name, your contact details, a description of the products and services supplied, the quantity and type of goods, the price charged, the VAT (or sales tax) amount and your settlement terms. If the invoice is clear and carries the appropriate detail, you can quickly agree with your customer what they owe you when you deliver the goods.

Watch your customers’ accounts

As you issue invoices, add these to your accounts so that you can regularly check what money you are owed by each customer. Be aware when any payment is overdue from a customer.

As you network in your business community, listen out for news about your customers. Similarly, when you deliver goods or visit your customers, show an interest in their business. You need to know if your customer is struggling with an overwhelming workload, or if your customer is missing payments to other businesses because their business is failing. Such situations could be a call to action for you.

Chase payments promptly

You must always chase your debtors promptly, usually with a polite letter or e-mail to remind them their payment is overdue. Then you need to talk on the telephone to the buyer, the managing director and the business owner to straighten out any misunderstanding about your intention to be paid what is due.

I advise my clients to keep a record of every letter, e-mail and phone call through their Customer Relationship Management system. Having these details readily available can help you to manage your overdue accounts – and can be used in court if necessary.

If your invoice is contested, hire a mediator. (In England and Wales, mediators are regulated through the Chartered Institute of Arbitrators. ) Using a mediator to pass judgement on the claim can help extract a fair payment.

Collect all bad debts keenly

In England, there are a range of debt collection agencies registered with the Credit Services Association. Some agencies will save you time and hassle by chasing your bad debtors, others will factor or buy the debt off you and foreclose on the debtor themselves. In most cases, when a customer triggers the need to collect their debt, you will lose all future expectation of business with them.

When court action is called for, get the advice of your company lawyer, check that your customer is still in business (in England through the Insolvency Service) and then use a Small Claims Court to chase debts under £5,000. Should your debts exceed this figure, you will need a lawyer to represent you at a higher court but the monies recovered often only cover the legal fees.

Treat payment management as a process

With the right attitude, many small businesses rarely suffer from bad debts. Part of that attitude arises from having a process within which to manage poor payers. The use of a payment process will usually encourage most customers to clarify misunderstandings about their payments at an early stage - possibly when you can still recover your (unpaid for) goods.

Adrian Pepper coaches people through business and personal difficulties, helping companies figure out what to do, how to move forward and what to get organised. You can contact him through Help4You Ltd , through his website at or by phone +44-7773-380133. At , you can listen to his podcast for small businesses.


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