The balancing act between ensuring you have adequate control over your sales ledger and maintaining good relationships with clients is a delicate one, people consider “Be too tough and you might lose business, be too lax and you risk profits” and quite often because of this businesses put off putting in place procedures and asking for payment and instead just work on hoping they will get paid because they have eventually sent an invoice.

For small businesses and start-ups, it may feel that you are bottom of the food chain and therefore at the mercy of your client’s payment habits. This resignation of power and willingness to put up with poor payment practices can leave small businesses vulnerable.

In a previous blog, Cash Flow is King, we discussed how the average SME is owed £64k in late payments at any given time. It is this kind of pressure from late payments that leads to a lack of access to working capital, which in turn contributes to 90% of business failures. Getting paid shouldn’t be this difficult, but for many UK SMEs, it is one of their biggest challenges.

But even with robust credit control procedures in place, there can still be a need to offer your clients credit terms giving you a 30, 60 or even 90 days cash strain and then there’s the ones who want a prompt payment discount (or you offer) further eroding your margins.

Invoice finance is an opportunity for many SMEs and startups to access working capital tied up in invoices, if it’s purely credit terms that are the issue and you have robust credit control procedures in place then Invoice Discounting could be the route for you or if you prefer, for various reasons, to outsource credit control then factoring is the route to consider, giving you sales ledger management and professional credit control.

With experience of financing business and running ledgers over the last 17 years we have learnt  a thing or 10 about effective credit control procedures so here is our guide to getting paid:

1.  Credit check

36% of UK SMEs do not routinely credit check their clients, and of those who do there are no measures in place to monitor their customer’s credit status on an ongoing or periodic basis. Few of us are in the position to be able to turn business away, but as we have said before, if you aren’t getting paid you are simply working for free or even worse incurring costs you will never recoup.

2.  Set (and stick to) credit limits

Once you have credit checked your clients, set a comfortable credit limit – and be strict at enforcing it, (unless something positive has occurred for you to consider a review and increase). If overdue accounts push your clients over it, make it your policy not to supply them with any more of your valuable time or products until they have cleared down enough of their account.

3.  Discuss payment procedures upfront and ensure your stationery is accurate and reflects this

When negotiating a deal, terms and conditions should be discussed upfront. It may be possible to optimise payment terms on an individual basis for your clients, and for many buyers, payment terms are as valuable a negotiation point as price – at least then everybody knows where they stand from the outset.

In addition, treat all customers as individuals. Find out who you need to talk to about invoice payments, what must be included on an invoice and when they do payment runs so you can set relevant reminders. Don’t make assumptions.

Then ensure you invoice stationery is correct (including your company details), that you have detailed what you have done/supplied, that the correct payment terms are included together with how your customer can pay, ensure its correctly addressed with the correct companies details and “for the attention of” and finally provide any back up paperwork that might be needed (proof of delivery, signed time sheet, signed satisfaction note etc)- make it easy for people to pay you.

4.  Ask for part payment or deposits

Your payment terms can work for you. Part payment upfront can eliminate some risk and provide liquidity for project or order fulfilment expenses and can reassure your client that you are fully engaged.

5.  Always thank your clients when they pay

This is a simple one, but a point that is often overlooked. The simple courtesy of thanking your clients for making a payment on time can go a long way towards fostering a positive relationship. Make it clear their business is appreciated and their timeliness even more so.

6.  Keep sales onside

The lure of taking a deal to make monthly sales targets is tantalising for the sales team, but if those sales do not eventually translate into payments, the sales team are not generating revenue, they are responsible for losses. Linking bonuses to payments is one way to ensure that sales are onboard with credit control policies.

7.  Offer discounts or rebates for prompt payment – but use with caution

Rewarding your clients for paying promptly by offering them a discount may seem like a sensible incentive, but exercise caution. Rewarding your clients for doing what they should be doing anyway – paying you what they owe you – will rapidly eat into your profits and doesn’t always motivate late payers, who either can’t pay or choose to put their cash flow ahead of their obligations.

8.  Introduce or threaten sanctions for late payment

By law, you are entitled to claim late payment compensation. Most businesses choose not to exercise their right to charge interest on overdue invoices issued on credit terms, in favour of fostering positive relationships. But the government actively encourage creditors to enforce these terms to help reign in the UK’s dismal late payment culture.

Under late payment legislation, an invoice is considered overdue the day after it becomes due, and you can calculate interest based on statutory interest of 8% plus the Bank of England base rate. To find out your daily interest (based on the current base rate of 0.75%), calculate as follows:

Daily interest = (total debt x 0.0875)

9.  Send reminders that invoices are becoming due, not just once they are overdue

Don’t let your invoices become overdue before you chase payment. Your agreed payment terms are a deadline, not a target, and scheduling in a friendly reminder a few days prior to the invoice becoming due can be all the nudge a client needs to make the payment. Don’t leave it more than a couple of days to chase the payment once the due date has passed either – the awkwardness should rest with the client. You had an agreement, and presumably, since you’ve invoiced you have fulfilled your end of the deal. They have reneged on theirs and it’s not rude to remind them.

10. Engage a third party to control your credit

A credit management or, when it’s really got bad, a commercial debt collection agency is one option, but naturally, we are inclined to suggest that you should consider invoice finance instead.  Professional credit control plusthe money you are owed, available to take, when you need it not just when they pay you.

Invoice finance helps you unlock working capital providing many business with a vital source of funding, cash at the time the sale is completed not months after the event.

Outsourcing the credit control process, can save you time, resources, money and remove one of the major stresses in running a business, combining this with a facility that grows as you grow seems to us to be good cash management.

Contact Partnership Invoice Finance to find out how we can help you take control of your sales ledger. Access the working capital tied up in your invoices before invoices become due, get paid on your completed work and fulfilled orders faster, and use this capital to grow your business.