Friday, 1 March 2013

Tempt your customers to pay on time

Small businesses who are struggling with cash flow due to late payment of invoices need to take urgent action.

Our senior partner, Graham Davies, said although the Government had called on larger businesses and local authorities to pay more promptly, the message was still not getting through.

"For many small and medium-sized businesses, this is a real issue, and they are struggling with the ebb and flow of erratic cash transfers. Companies have been encouraged to back the Prompt Payment Code, but this is voluntary and if a large business or organisation does sign up, and then ignores the ethos, they don't face any kind of penalty.

"So it's up to smaller businesses to take action in order to protect themselves, and they need to look at incentives to motivate their clients to pay more promptly."

Graham said most invoices were issued with strict payment terms, such as "payment due within 30 days".

"But you could consider including a clause that gives them a small discount if they pay early - it may sound as though you'd be losing money, but in fact you'd have the vast majority of the payment in your bank earlier than planned, and it would save you the time and cost of chasing for payment.

"And to make such a discount even more tempting, include a reference on the invoice that interest will be applied to the full outstanding amount from the first day payment is overdue and include the rate you plan to charge.

"If you don't mention the actual rate you will use, you will only be entitled to charge the county court rate which is currently 8% - why not increase the rate to perhaps 15%?

"When your customer looks at the options of paying early at a discount or facing late payment charges at that kind of level, they will surely see sense and pay your bill as soon as possible."