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Finance | Why are late payments so common for small businesses?

Why are late payments so common for small businesses?

Late payments for small businesses are a major issue. They disrupt cash flow, distract from other priorities and, at their worst, derail long-term plans. The problem is especially acute for smaller businesses, which are more likely to struggle to absorb the extra costs that delays bring.

But why are late payments so common? In this article, we’ll summarise some of the most common reasons for late payments - and how you can deal with them.

The Top 5 Reasons for Late Payments

1) Cash flow problems

Clients might be reluctant to pay what they owe because they have issues with their cash flow. If this is the case, you might see clients withholding payment until they receive payment. In this way, they may themselves be victims of late payment. Unless you agreed a ‘pay when paid’ provision with your client ahead of time, you should not accept this excuse for late payment.

A good response is to ask for the details of the client’s debtor and date of payment and to contact them directly. Clients will often be unwilling to provide this information, and showing you’re serious can sometimes convince them to avoid the hassle and pay up.

Note also that there may be other reasons that a client is struggling with their cash flow. The ongoing COVID-19 pandemic is a serious source of disruption, and many businesses have relied on sometimes shaky government support over the last two years. In cases of genuine disruption, you should request firm information on when your debtor will be able to pay you and consider setting up a scheme of payment in instalments.

2) Missed or mistaken invoices

Your clients may be paying you late due to problems with your invoicing. You should make sure all invoices are:

  • Sent on time

  • Clear and easy to read

  • Filled out with correct, up-to-date details on how and when to pay

Before hounding clients and potentially souring relations, make sure you sent them the correct invoice with the correct due date. To help avoid this problem, you can also use accounting software. Systems like QuickBooks allow you to automatically generate and send invoices and will flag any delays or issues for you.

3) Problems with goods or services

This can take on several forms. Clients might claim that your goods or services were provided late or even that they never received them at all. To avoid this, make sure to get proof of delivery and customer acknowledgement of receipt.

In other cases, however, clients might report a problem with the goods or services they received. It is especially frustrating when they wait until payment is due to raise the issue. To resolve this and receive payment, ask your debtor to clarify their problem in writing and to provide evidence. If there is a genuine issue, agree on a course of remedy as soon as possible, with strict provisions covering payment.

4) Clients pay on their terms

This refers to circumstances in which clients can, allegedly, pay you - but do not.

Specific reasons given might include:

  • Waiting for a change of bank account

  • Waiting for a change in personnel (eg. a new accountant)

  • Sticking to rigid payment processes (eg. ‘we pay at the end of the month’)

In each case, the client is attempting to delay paying you because of something that is not your fault. While a change in bank account can be a legitimate reason for late payments, it can only justify very short-term delays. Similarly, changes in personnel should not produce long-term disruption.

When a customer claims they will pay you on their preferred date, meanwhile, you can often force action simply by pressing them. Remind them of the terms of your invoice, and don’t take no for an answer.

5) Letting them get away with it

Finally, perhaps the most common underlying reason for late payments is that businesses simply do not put enough effort into ensuring their clients pay. Ultimately, you need to make not paying you more trouble than simply paying you would be.

When clients fail to pay, take the following steps:

  • Contact them informally via email

  • Follow up by phone call

  • Send a formal written letter requesting payment

If this doesn’t work, your final recourse is to take legal action. Beware, though, as this can be very pricey and time consuming.

Dealing with late payments can be costly and difficult - but understanding the reasons they occur can help you be ready to deal with them.

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