Unpaid invoices are a serious threat to your IT business.
Latest research shows that the average SME is owed £63,881 in late payments, with 11% owed over £100,000.
According to the Federation of Small Business (FSB), this equates to a £2.5bn hit to the UK economy and contributes to the demise of 50,000 SMEs each year.
Staggering statistics that create a recipe for business disaster: compromised cash flow, wasted time and money and damaged customer relationships.
Here we explore why unpaid fees cause such disruption and how you can tackle the persistent late payee problem to drive your IT business forward.The Late Payments Ripple Effect
If your clients don’t pay you, you can’t pay yourself, your suppliers or your staff. Getting paid on time is absolutely critical to your ongoing success.
Cash flow can challenge even the most promising of businesses. You could be offering the best IT support and web hosting services available, but if you’re repeatedly let down by clients who don’t pay on time, all your hard work could be for nothing.
Unpredictable payments make forecasting, and even the future of your business, uncertain. If you don’t have the optimum payment system in place, you can very easily lose control over cash flow.
Constantly dealing with late payments will also impact on the amount of time, money and energy your team has to spend chasing the unpaid cash.
According to Bacs, 42% of companies waiting beyond agreed terms of payment are spending up to four hours a week chasing payments. That means four hours of awkward conversations asking for money: not a task that anyone would relish.
Repeated phone calls, emails and reminder letters are a drain on your resources and a threat to your customer relationships. Instead, time could be spent on developing your business and building those relationships to secure future growth.
How to Collect Your Cash
You’ve done the work. You’re owed the money. However uncomfortable it makes you feel, remember that you’re entitled to demand payment: you need it to pay your bills.
Start politely and forget any thoughts that by chasing unpaid fees you’re somehow being rude. In many cases, unpaid invoices may simply be an administrative oversight.
When an invoice payment deadline passes, the first step is to send a friendly but firm email. Giving clients the benefit of the doubt and a chance to say: “Please accept our apologies for the delay” before depositing the money in your account, will protect your relationship.
If this approach doesn’t have the desired effect, it’s time to ramp up the rhetoric by being a little firmer in a second email. Working from a script can help here to cover off the agreed terms and conditions that are being ignored.
Still no luck? After 7-10 days, forget email and pick up the phone. This is where awkwardness can rear its ugly head but prepare what you want to say in advance, including answers to potential excuses, and go for it.
Often, a friendly chat will do the trick. Keep phoning every day until you get a result or make the decision to move to the next step.
If your client is usually a reliable payer, use your discretion to decide whether to extend their payment window. If they’re a permanent fixture on your unpaid invoices list and more than 30 days have elapsed, you may have to resort to legal action. And of course, if it drags on this long, cease all work for them until they settle their bills.
How to Minimise Late Payments
1. Set out your terms and conditions
Make your payment terms clear right from the start of your client relationship. Tell them what they need to pay, when they need to pay it and highlight any penalties.
The details are entirely up to you: it’s standard practice to request payment after 30 days but you could choose to only charge an extra X%, in addition to the amount due, if it remains unpaid after 60 days.
Providing this kind of transparent information means that if you do have to deal with unpaid invoices, you can simply refer to the previously agreed T&Cs. You’ll have a paper trail that will defeat any argument that your client wasn’t aware of the deadline.
2. Send out invoices on time every time
Being efficient yourself will help to encourage client efficiency. Invoicing immediately and including all the necessary details can help to ensure you get paid on time.
Accuracy is also important as any avoidable invoice mistakes could lead to a payment delay.
3. Keep communication channels open
An ongoing positive client relationship will help enormously when you’re faced with unpaid fees. Good rapport will smooth the way when trying to recoup the debt.
Remember that there may be a genuine reason for non-payment and getting to the bottom of it will benefit both parties. Together, you may be able to resolve the issue by changing something as simple as their regular payment date.
4. Offer the most convenient payment method
You can dramatically reduce the number of unpaid invoices you have to deal with simply by offering your clients a different payment method.
Sound too good to be true?
Direct Debit is used by thousands of SMEs, including IT companies like yours, to automate the payment process. Instead of relying on inflexible Standing Orders, erratic credit card payments or archaic cheques in the post, you’ll know exactly when to expect regular client fees.
By enlisting the help of a Direct Debit bureau such as Fast Pay who will oversee the scheme for you, payment will be taken from your clients’ account as soon as it’s due. Reliable, predictable and secure, it will dramatically reduce your debtors’ list while securing cash flow and reducing time-consuming admin.
Instead of chasing unpaid fees, you’ll have the time and money to chase new business.
5. Sign up to the Prompt Payment Code
Administered by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy and Industrial Strategy, the Prompt Payment Code sets the standard for payment best practice.
Signing up to the code, and encouraging your clients to do the same, commits you to paying suppliers on time, giving clear guidance to suppliers and paying within a maximum of 60 days, aiming for 30 days as the norm.
How to deal with late payment excuses
You’ve no doubt heard them all. These days, not many clients can get away with insisting “the cheques in the post” but there are plenty more excuses for not settling a bill on time. Here’s how to deal with a selection of them:
6. “We can’t afford to pay you yet.”
Supply chain issues may mean that your client simply doesn’t have the funds to pay. You may have a verbal promise of payment but that doesn’t equate to cash in the bank. Their cash flow issues become yours too.
If they’re a loyal client struggling with short-term cash flow challenges, you can avoid sullying your relationship by harnessing the power of Direct Debit.
It allows you to split the overall invoice into manageable amounts spread out over several months. This flexibility will bridge the gap, giving you definite dates in the diary when you can look forward to payment instalments.
Of course, if you use Direct Debit to manage regular payments this situation is unlikely to crop up. Your client will have budgeted for your services in advance and known when payments were due.
7. “We never received your invoice.”
This is a common excuse and stalling tactic, often delivered around the time the invoice is due. If you rely on old-fashioned payment methods, you can ask for email confirmation of receipt of your invoice. This creates an electronic paper trail you can rely on if necessary in the future.
Switching to accepting Direct Debit means that the payment process will be automated, eliminating the possibility of invoices ever going AWOL. Specialist software will keep track of all invoices and payments, and clients can be sent a reminder that their account is due to be debited.
8. “We’ve lost your bank account details”
Especially disorganised clients might claim they’re not sure how to pay you as they’ve misplaced your invoice. If you’ve designed your invoices professionally, all bank details should be clearly displayed.
It’s easy enough to give them the missing information but you can avoid this delay altogether by using Direct Debit. Once your customer has completed a mandate giving you permission to collect funds from their account, their admin work is done.
10. “The number you are dialling has not been recognised.”
Some clients have the cheek to vanish without trace. You’ve emailed and called dozens of times, and short of turning up on their doorstep several hundred miles away, you’re not sure how to recover the debt.
In these rare instances, you can either hire a professional debt collection agency, pursue them through the small claims court or simply write off the invoice. None of these options are ideal but are occasionally necessary.
With Direct Debit, you’ll be automatically notified if their payment is cancelled, bounces or fails. This will alert you to a problem quickly and allow you to tackle the issue professionally.
Falling victim to late payments needn’t be your IT business’ fate. There is an alternative. Consider partnering with a Direct Debit bureau and say goodbye to the dreaded debtors’ list.