A sale is not a sale until you have been paid. It is your right to get paid on time, no matter how big or small your business is. Good credit control doesn’t just happen – you need to set up a system.

This guide identifies the key elements of a system that will help ensure you get paid promptly.

Set up a system to collect debts

Before taking the order

Gather as much information as you can about the customer.

• Confirm details such as the exact trading name and status (e.g. sole trader, limited company, partnership, limited liability partnership or plc), plus the customer’s invoicing address.
  
• Ask whether they usually pay by cheque or electronically (BACS), and when they normally pay bills.
  
  • If they are paying electronically, make sure you give them your bank details straight away.
    
  • Find out if they only do a cheque run on certain days of the month.
    
• Ask for, and follow up, references from some of your customer’s other suppliers. Questions to ask include: ‘Do they always pay on time or late?’ ‘Do they always pay in full?’ ‘Is there anything in particular you think I should know about them?’
  
• Before offering credit, always try to check their track record by doing a credit check. These are simple and inexpensive to do.
  
• Set a credit limit for each new customer and do not be tempted to exceed it before the customer has built up a good track record.
  
• Make sure you point out your terms & conditions, especially the payment terms. Ask the customer to sign them.
  
• Ask for an official purchase order, because many companies will not pay your invoice without one.
  
• If they don’t issue purchase orders, prepare and issue a confirmation of the order and get them to sign and date it.
  
  • For a product, give a clear description, including the size, quantity, type or model, colour and price.
    
  • For a service, specify appropriate details such as what is to be delivered, deadlines for delivery, your hourly or daily rate, and whether it includes travel, materials and VAT.
    
• If the sale is agreed over the phone, get the name of the person placing the order and follow it up immediately with a written confirmation of order that they can sign and return to you. Although a verbal contract is binding, it makes life a lot simpler if you have agreements in writing in case problems arise later.
  
• If the order or work is to be staged, suggest that a standing order or direct debit is set up. Obtain copies of the necessary forms from your bank and have them with you, so this becomes part of your sales presentation.

• Invoice as soon as possible after you have completed the job or delivered the goods. Don’t wait until the end of the month.
  
• Show the date of invoice, your invoice number and the date you expect to get paid (e.g. x days from the invoice date, or from the end of the month).
  
• Include the customer’s purchase order number or, if you haven’t been able to obtain one, a copy of the signed confirmation sheet.
  
• Include the name of the member of your staff who took the order, as well as your own contact details, so customers can get in touch easily if they have a problem with the invoice.
  
• Make invoices clear; include a description of what they have received, with times and dates if appropriate.
  
• Check each invoice before it goes out for errors or omissions. Make sure everything you have invoiced for has in fact been delivered, and vice versa.
  
• Depending on the amount to be paid, you may want to follow up the invoice by phone within four days of sending it to confirm that it has arrived and that the way is clear for payment to be made on time.

• Chase payments as soon as they become overdue, starting with the highest value invoices first.
  
• Keep an up-to-date list of debtors at hand so you know when each debt becomes due. Then, if the customer calls to place another order, you are in a good position to ask for payment on the outstanding one.

Research conducted by a factoring company found that six main reasons for late payment are:

• ‘Waiting for the cheque to be signed’ – 23%
  
• ‘Lost the invoice, send a copy’ – 22%
  
• ‘Cash flow problems’ – 16%
  
• ‘Account handler is off sick or unavailable’ – 15%
  
• ‘The cheque is in the post’ – 6%
  
• ‘A computer system is being installed’ – 6%

A good system for chasing payment will help you overcome these problems.
Factoring can also be used in conjunction with your own system. Factoring companies advance you a percentage of the cash – usually between 75% and 90% – when you issue your invoice. The balance, less the factoring companies’ costs of around 1.5% to 3.5% plus interest, is paid to you when the debt is recovered in full. You get the benefit of cash sooner and the greater influence of the factor to chase debts.

How to chase late payments

For late payers, set up a system of chasing that will work for you – and then be sure to use it.

• Start with phone calls and progress to letters. The first call should be quite friendly, simply asking when you can expect to receive the payment that is now overdue.
  
• Log every phone call and other contact you make chasing the payment, noting down to whom you spoke, the time and date of the call, and details of the conversation. Confirm every phone call in writing.
  
• If the customer is not too far away, say you will come in person that afternoon to pick up the cheque. Be prepared to sit and wait a while.
  
• Write, but always keep the tone business-like, no matter how angry or upset you are. Prepare some standard letters:
  
  • The first might state that you are disappointed not to have received the payment as promised by the customer in your telephone conversations. Draw attention to your terms and conditions regarding payment, which the customer agreed to. This letter can be sent a week after payment was due.
    
  • The second would be firmer, warning that if payment is not received within, say, seven days, you will have no alternative but to place the matter in the hands of your solicitor. Itemise each phone call you have made and reminder messages you have sent.
    
  • The third letter would inform the customer that you have now put the matter in the hands of your solicitor. This can be sent after they have not met the deadline you outlined in the second letter.
    
• Stop supplying further goods or services to the customer if they have not paid by a set time past the due date. Remember a sale is not a sale until it has been paid for.
  
• Never make idle threats. If you have said you will put the matter in the hands of a solicitor or debt collection agency, do so promptly.
  
• It is illegal to harass debtors for payment. You cannot, for instance, advertise late payers in your shop window.

Interest and late payment

Even if you have not been specific about it in your terms and conditions, you may be able to claim interest on late payment.

If another business pays you later than agreed, you have the legal right to claim interest on the overdue amount. Unless your terms of trade say otherwise, payment is due after 30 days.

The rate you can charge on overdue bills is calculated daily at the Bank of England base rate plus 8 per cent. So if the base rate is 4 per cent, you can charge interest at 12 per cent. You should charge interest on the whole outstanding debt (including any element of VAT).

Of course, you will have to decide whether you intend to charge all your customers interest on late debts or just the one or two that regularly fail to pay on time. Whatever you decide it’s important to forewarn your customers that you intend to claim interest on late payments.

Spreading the risk

However effective your system is, it will not be risk free. You should avoid large exposure to any one or few customers. Consider whether any of the following ideas might work for you:

• When taking an order, try negotiating part-payment in advance, with the balance payable on delivery. Maybe offer a discount for this or an extra service that your customer will value but which costs you little.
  
• For long-term contracts, issue interim invoices at the end of each week/month. State clearly that they are for part-delivery or work in progress.
  
• If payments are staged, suggest setting up a standing order. These can be ongoing regular payments or can be for a specific amount on a specific date(s).
  
• In service-based industries, you may be able to negotiate a retainer. With a closed retainer both parties agree a list of projects to be completed during the term of the retainer. In an open-ended retainer you provide your services on an as-required basis. For instance, a PR consultant might be promoting a new product (closed) or promoting the organisation generally (often open-ended).

If you are firm, polite and professional, these tactics will not alienate customers. Conversely, you may earn their respect and trust.

If you feel yourself wavering, consider this cautionary tale. A buyer at one of the UK’s biggest retailers says, ‘Big firms such as mine like doing business with small businesses. They have many advantages: the ability to be flexible, to respond quickly and to offer a level of service that has long been forgotten by many larger firms. But in many cases they also have another advantage: they don’t need to be paid on time because they are so unprofessional about asking for it.’

Many small businesses are so busy trying to land or fulfil orders that they forget to set up a proper system for turning a sale into real money – money that can be used to pay their suppliers – or even themselves! An effective and organised system will help you control your cashflow and encourage your customers to pay you on time.

Further Contacts

• Better Payment Practice Campaign
  W: www.payontime.co.uk

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