For most small businesses, cashflow is the biggest regular headache. Which is why, especially when you’re dealing with companies much bigger (and more cash-rich) than you are, it’s frustrating that they regularly pay late. Why does it take them so long?
“The dog ate my homework…”
Common responses when you chase an invoice include:
- “What invoice? Sorry, I don’t think we’ve received it. Please re-send.”
- “You sent it to Office X, but the original should have been sent to Office Y with copies sent to Offices X and Z.”
- “We rejected it because it doesn’t comply/has no PO number/is on the wrong colour paper…”
- “Sorry it takes so long – one of the problems with large companies. But you know we’ll pay eventually.”
Avoiding late payments
To avoid excuses like these holding up the payment process, make sure you understand how the customer’s system works before you start delivering. Ideally, set out their invoicing requirements (number of copies, format, recipients, etc.) in your contract with them.
Once you have this information, comply with it! Sending invoices that you know the client will reject is a waste of time, energy and goodwill.
When you’ve sent your invoice, call to check it’s been received and is correct and ask when it will be scheduled for payment. By calling straight after sending the invoice (not waiting until it’s overdue), you can gain valuable weeks of cashflow. Some companies don’t submit an invoice for payment until it’s been chased by the vendor. By chasing immediately after submitting an invoice, you ensure it goes straight into the system – getting you paid up to 30 days sooner!
There are two main reasons for refusal to pay:
- The client doesn’t believe you’ve delivered what you said you would
- They don’t agree that your payment terms apply to this deal
The first can apply to deliveries that fail the client’s quality testing, don’t match their description, are short on quantity, or simply don’t meet their expectations. This is where your contract has an essential role to play. It should state clearly what criteria must be met for you to get paid. If your deliverable has to pass certain tests, match a specification or meet certain requirements this should be listed or referenced in the contract.
Your contract should also allow for ‘deemed acceptance’ if the client doesn’t tell you there’s a problem within a certain time of delivery. This means that unless you hear otherwise, the delivery is accepted and your invoice should be paid.
Your contract should state payment terms clearly and unambiguously. Avoid jargon like “payment terms are 30 days net”. Use simple language like “payment is due 30 days from the date on the invoice”.
What if the client says their payment terms apply?
This comes down to “the battle of the forms”, meaning that if there’s no signed contract, the last set of terms to be exchanged before the contract is made are the ones that apply. Get your client to sign up to your terms or to reference your terms on their Purchase Order. If you offer credit terms and require customers to sign some sort of ‘account application form’ in order to benefit from them, you can incorporate your terms into the account application process, which is a quick and effective way to sign clients up to your terms and conditions.
Bear in mind that if your invoice is sent post-delivery, any terms on it have no legal significance as this is considered to be happening “after the contract is made”. So if you’ve delivered in response to a client Purchase Order which says payment will be made in 90 days (effectively accepting the client’s purchasing terms and creating a binding contract), stating 30-day payment terms on your invoice will have no effect.
If you are obliged to accept the client’s terms, check what they say about payment – if the terms are unreasonably long, remind them of their responsibilities under the new EU Directive on Late Payments and see if you can negotiate fairer terms.
What happens next?
If all this fails to secure payment and reminders haven’t worked, you have two more options.
The first is to stop delivering any more goods or services until your overdue invoices are paid. Referred to as putting an account “on stop”, this is very effective if the client needs more of what you sell. However, you must include a statement in your contract that you are entitled to withhold products and services if the client is late paying, otherwise putting them “on stop” might put you in breach of contract and liable for damages to your non-paying client!
The second option is your right to charge interest and debt recovery fees. You automatically have this right under the Late Payment of Commercial Debts (Interest) Act 1998. Calculate the interest and compensation you’re entitled to at www.payontime.co.uk.
The recently enacted EU Directive on Late Payments (2011/7/EU) will give even more teeth to the existing UK legislation, meaning that Government bodies will be obliged to pay suppliers within 30 days of their valid invoices. Commercial buyers will also have to take a fresh look at their payment terms, with terms over 60 days only being permitted if they are not ‘grossly unfair’ to the vendor.
Enforcing your rights
Having these rights is one thing, enforcing them is another – it’s been demonstrated that the more often you enforce your rights, in the right, professional way, the less frequently you need to. Consider this part of your ‘client education programme’.
Contrary to popular belief (particularly among small businesses), threatening to invoice late-paying clients for interest rarely damages the relationship. Instead, it encourages them to pay promptly, so they don’t have to deal with an invoice for interest that doesn’t have a corresponding Purchase Order![Images Simon Kemp & courtesy of Naypong/FreeDigitalPhotos.net]