How to avoid late payments in a crisis

24/03/2020

Unfortunately, during uncertain and challenging times, some companies choose to withhold payment to suppliers beyond agreed payment dates to protect their own cash flow.

As well as this, the economic pressures often result in increased insolvencies.

This can have a knock-on effect down the supply chain and quickly escalate into a serious cash flow issue for numerous business.

Fortunately, there are some steps you can take to reduce the risk of late payment in times of crisis, or at the very least limit the damage to your cash flow.

1. Manage your risk

Of course, if you can, you’re going to want to keep accepting orders and providing your services for as long as possible.

But with the economic uncertainty that comes with a crisis, it’s vital that you only proceed with orders after assessing what risks it will pose to your cash flow.

So always check the creditworthiness of all customers before entering into an agreement with them.

You can get to know your customers and the risk they pose to your business by using account opening forms, performing credit checks, researching them online and building a relationship with them.

You mustn’t assume that, just because a customer has always been financially stable and paid on time in the past, they will continue to be able to do so.

In times like these, even the strongest of businesses can struggle and credit ratings may change very quickly.

So it’s wise to keep a constant eye on the situation, perform ongoing credit checks and be wary of any changes.

If your research indicates that the customer is a risk you may want to adapt your credit terms, ask for a deposit or decline the custom completely to protect your cash flow.

Discover how well you know your customers

2. Keep in regular contact with your customers

In times of crisis, communication is key to overcoming most challenges.

This is particularly true when it comes to managing expectations and collecting payment from your customers through uncertain times.

Therefore, it’s essential that you maintain open lines of communication with your customers as best you can.

Put in regular courtesy calls to check your customers’ statuses and how they are dealing with the crisis.

This will show that you care and keep your business front of mind.

It also has more practical benefits, such as allowing you to check the status of any upcoming payments, identify any potential delays and highlight any changes in personnel due to the crisis.

This information is key to staying on top of payments and preventing any invoices from going overdue. It will also help to identify potential problem cases with enough time to reduce the impact on your business.

At the very least this exercise will remind your customers of their obligation to pay and the impact that not doing so may have on your business.

Remember, though, that open communication works both ways. Let your customers know if your opening times have changed or if it’s business as usual so that they know how and when they can contact you.

Without this information, you may give them an excuse to further delay payment.

What to cover in your courtesy call

3. Recognise the warning signs

It’s always good to know the warning signs that a customer may not be able to afford to pay you.

In times of crisis, things can change so quickly that it’s especially important to keep a watchful eye for any potential issues.

Firstly, it’s worth assessing which sectors have been most impacted, as these may pose an extra risk.

Secondly, keep an eye out for sudden changes to a business. Whether it’s changes in buying patterns, sudden stock or asset sales or even reduced service levels, any sudden changes should start alarm bells.

As well as this, any customers who are suddenly harder to get hold of may be a risk. If your calls are going unanswered and you’ve left multiple messages or emails without a reply, it might be a sign that your customer is avoiding you and is unable to pay.

Also, if you have a gut feeling that a customer is going to pay late, you’re probably right. Learn to trust your instincts and, at the very least, treat these customers with caution.

More signs that a customer might not be able to pay

4. Create a stop or a watch list

Using all the information you have gained in the steps above, it could be beneficial to create a stop list and a watch list to protect your business from the riskiest customers.

A watch list is simply a way of highlighting any businesses which may pose a threat to your cash flow so that you can treat them with added caution.

This could be businesses in sectors which have been hit hardest by the crisis, those with a bad credit rating or customers who have shown warning signs that they cannot pay.

When dealing with businesses on your watch list you may want to adapt your credit terms, ask for a deposit or decline the custom completely to protect your cash flow.

Any persistently troublesome customers should be placed on a stop list and refused any further goods or services until all outstanding invoices have been settled.

If, after this, you continue to supply the customer, it could be beneficial to keep them on your watch list and treat them accordingly.

Discover why not supplying bad customers makes perfect business sense

5. Keep on top of your sales ledger

By showing which invoices have and haven’t been paid, your sales ledger provides an instant overview of your current status.

Maintaining a regular and thorough check of your sales ledger will be key to identifying any problem invoices with enough time to reduce the impact on your business.

First, look at any invoices which are currently overdue and contact those customers as soon as possible.

Use this opportunity to find out why they have yet to pay, resolve any disputes and discover when they expect payment to be made. This will allow you to highlight any potential problem cases that may need further attention.

Then, move your attention to all of the invoices approaching their due date.

Contact these customers by telephone to check the status of the payment and confirm that it will be made on time.

Again, this exercise will allow you to spot any potential issues at an early stage to limit the damage to your cash flow.

Should your sales ledger reveal that a high proportion of invoices are unpaid beyond your agreed terms, it could be time to consider additional support from a debt collection agency.

When should my business consider using a debt collection agency?

6. Offer incentives for early payment

If you’re concerned about your cash flow it could be beneficial to offer early settlement discounts to encourage your customers to settle their invoices early.

Offering a discount to customers who pay early may seem counter-productive but, in many cases, it can be financially beneficial.

Whilst it does mean you would get paid slightly less, it can often be more beneficial to your business to be paid the majority of an invoice’s value early than it is to receive the full amount outside of terms.

Plus, in these uncertain times, many customers that can afford to settle their invoices early will appreciate the discount.

Find out more about how early settlement discounts help business

7. Act quickly

When it comes to chasing late payment, speed is always crucial. After all, the longer an invoice goes overdue the less likely it is to be collected in full.

And with uncertain and challenging times impacting payment times, it becomes even more vital to act quickly.

In times of crisis, the situation is often constantly changing and can rapidly escalate. Add the increased risk of debtor insolvency and it’s more important than ever to collect payment as quickly as possible.

So it’s vital that you keep on top of the changing circumstances and don’t delay at any stage of your collections process.

8. Consider specialist support

The increased risk of late payment and reduced staff numbers can place a lot of pressure on credit control departments.

If you feel like you are exhausting all of your internal efforts trying to recover overdue invoices, it can be beneficial to pass any outstanding debts to a debt collection agency.

A debt collection agency will use their expertise to get the results you need whilst you concentrate on newer debts or other aspects of your business.

Call our collections experts on 0800 9774848 to discuss any overdue accounts you’re concerned about, or get an instant debt collection quote.