How to spot a late payment before it happens
Given the adverse impact a single late payment can have on any business, wouldn’t it be great if we could predict when a customer isn’t going to pay on time?
Doing so would not only enable us to take extra precautions and adjust cash flow forecasts, we could also increase communication with the customer and apply pressure earlier to increase the likelihood of timely payment.
Well, we think there are a few tell-tale signs which indicate your customers might struggle to pay you on time.
The earliest warning signs go right back to when you’re taking the order, before any credit has been offered.
Does the contact information look suspicious? If they have an unprofessional or spammy email address or if they provide a PO Box address and mobile number for contact information, then you should question if the customer is legit.
A good way to spot these initial signs is to use an account opening form. This should ask for all necessary business information including their full trading name, legal status, registration number, address and the key contact details of the management and contacts responsible for accounts payable.
Another warning sign is when a customer refuses to sign a contract. A contract is an important tool which can be used to your advantage in the event a customer doesn’t pay, so always make sure that a contract – or formal acceptance of your company’s Terms & Conditions of sale – is signed before you provide the goods or services.
Although it is not an automatic red flag, if the customer doesn’t have an accounts payable department you should be wary. Often, in these instances a single person is responsible for a number of different jobs and therefore paying bills may not be their top priority.
You might also want to be wary of customers who demand to pay by cheque. Whilst this doesn’t necessarily mean that they won’t pay you, it does give the customer room for stalling payment, factoring in the postal service, the time it takes for cheques to clear and the excuses that commonly accompany cheque payments.
If you are suspicious, you might want to request full or partial payment upfront to limit the risks to your cash flow.
Strange client behaviour
Whilst it’s good to get to know your customers on paper through methods such as account opening forms, it’s also good practice to get to know their normal behaviours through building a relationship.
Creating a rapport with your customers is a good way of building customer loyalty and keeping your invoices front of mind, particularly as part of the credit control process.
It will also allow you to spot any sudden changes in their behaviour that could be a sign of trouble. This can range from their telephone manner to the tone of their emails.
Key quirks to look out for are clients which are disorganised, indecisive, extremely over-critical or hesitant.
These behaviours can be a sign of trouble and, at the very least, you should proceed with caution.
History of poor payment
It’s likely that customers with a history of poor payment will continue to pay poorly in the future. Have they paid your business late in the past, for instance, or do they have a track record of paying other companies late (or not at all)?
Performing a credit check will reveal if they have a bad credit rating or any County Court Judgments filed against them.
You could also look at their filed accounts, which could give you insight into their financial health. Late filings in particular could be a sign of trouble.
As well as this, payment reporting regulations require all large businesses to report on their payment practices. Accessing this information could reveal if they have a history of missing payment deadlines.
If any of these sources reveal that your customer is a risk, you should consider taking full or partial payment upfront.
The employees of a business often a reveal a lot about the company without ever even saying anything.
As mentioned above, strange behaviours can be a sign of a trouble. But what’s perhaps more revealing is when employees disappear altogether.
If a company is struggling, their staff may decide to seek other employment. This could be because they’re worried about their job security or to escape an unpleasant working environment. If there is a high staff turnover this should start alarm bells.
Another sign that a company isn’t performing well is when a number of top-level executives resign over a relatively short period of time.
Don’t be afraid to ask questions when an employee leaves suddenly and make sure that you always keep up-to-date with contacts at the company so that you always know the most relevant person to contact for payment.
Without the right contact information you are likely to experience delays in payment whilst emails and calls are bounced around the business.
Lack of communication
If your calls are going unanswered and you’ve left multiple messages or emails without a reply, it may well be a sign that your customer is avoiding you and is unable or unwilling to pay for your goods or services.
The same is true if you’ve sent the customer a letter which hasn’t been signed for or it’s been returned.
The moment that you realise your customer is becoming harder to reach, you should invest time to get to the bottom of the situation. Step up efforts to make some form of contact with the business, whether with your accounts payable contact, directors of the business or the person who placed their order initially.
In the event your invoice due date comes and goes without payment being received, you should then act quickly to engage a specialist debt collection agency. Often, their name and weight alone can result in contact being established and payment being made, and should further contact attempts go unanswered or ignored they will also be able to assist by tracing the debtor.
Sudden changes to the business
Another sign that your customer might not be able to meet an upcoming payment deadline is sudden changes to the business.
Whether it’s changes in buying patterns, sudden stock or asset sales or even reduced service levels, any sudden changes should be cause for concern.
Whilst reduced activity is a clear sign of trouble, it’s also important to be wary of the opposite happening as rapid business expansion could also be an indicator that cash flow difficulties may lie ahead. Overtrading can cause serious problems as businesses struggle to fund the additional requirements of large orders.
Keep a watchful eye on industry news, too. This could highlight if there are any challenges throughout the industry that could impact on your client and their ability to pay you.
It could be a natural instinct, but more likely it’s a skill gained from experience. The more you work in credit control, the easier it is to spot when your customers are likely to give you the run around.
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.
Each of these signs are only possible to identify if you have robust credit control processes in place.
If credit control isn’t prioritised within your business, spotting changes in client behaviour and communication becomes much more difficult.
So if late payment is a problem for your business, with customers regularly paying late or not at all, consider the benefits of outsourcing your credit control to a specialist agency.
To help you decide if outsourcing is the right approach for your business, read this article on the benefits and considerations of collections outsourcing.