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19 June, 2020

Five tips to avoid receiving late payments – and maintaining cash flow

coin in jar with cash flow text, Financial Concept.

Chasing clients for payments and maintaining good relationships with them has always been a delicate balancing act for businesses.

On the one hand, cash flow disruptions are among the biggest issues for small business, and a proportion of clients need to be chased for money. On the other hand, client relationships are crucial for repeat business – chasing payments can impact on that relationship.

Following Australia’s economic shutdown and its subsequent impact on business income, getting paid on time is expected to be more of a challenge for businesses this year.

Here are my tips for avoiding late payments, without souring relationships with your customers:

1. Speak to your clients directly

As a business owner, you might feel that it’s best for your bookkeeper or accountant to chase late payments. However, if your business has a small number of clients, try reaching out and speaking to them directly. This can have an impact on how they view your business, how important they are to you, and will allow you to organise a suitable payment strategy.

2. Shorten your payment terms

If you offer 30-day payment terms, try reducing them to 14 days. Psychologically, this will increase the chances of your invoice remaining at the top of your clients’ payment schedule.

3. Offer discounts for early payment

If your business is heavily dependent on cash flow, you may wish to consider offering discounts on invoices paid early. Offering a ‘COVID-19 discount’ on invoices, for instance, illustrates to your customers that you recognise the current situation, without sacrificing your need to continue operations. Improved cash flow means you may also be able to take advantage of early payment discounts from your own vendors.

4. Add fees to late payments

Extending payment terms and offering discounts for prompt payment will not necessarily benefit your business to the same degree that it will for your customers, so applying a late-payment charge to extended invoices is an appropriate balance. Small businesses are reliant on cash flow, and both your vendors and customers will understand this more than ever in the current circumstances. Offering an incentive for early payment and a clear deterrent to late payment is an effective balance to help streamline invoice payments and keep your business operating. You could, perhaps, offer a three per cent late fee for every 30 days that a payment is overdue.

5. Consider invoice factoring

If you have exhausted all options, consider invoice finance as a temporary method for recovering payments. Invoice finance is available from a factoring company: it allows a business to sell invoices to a factoring company, receive an upfront payment on the invoice of up to 80 per cent, and claim the remainder of the invoice amount – minus a factor fee – once payment is made. When choosing a factoring company, make sure you understand how they collect payment from your customers. Some will collect directly – and your customers will know you are using a factoring company – while others may choose to be more discrete to prevent deteriorating client relationships.

Chasing late payments is an unfortunate reality of running a business and can cause cash flow issues. However, there are many ways you can adjust your payment terms and organise payments with customers before overdue payments become a major issue.

Speaking to your customers, adjusting invoice terms, offering discounts and charging late fees are all things that can be done by your in-house team, while the convenience and flexibility of invoice finance can always be used as a reliable back-up.

This article was written by Helen Baker, who is a financial adviser, author, speaker, and spokesperson for online finance information platform Money.com.au.

Featured image: iStock/3283197d_273

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cash flow client relationships Helen Baker invoice factoring late payments payments small businesses travel agents