Late paying customers can cause some serious problems within a business, but this is particularly an issue for small and medium sized businesses and start-ups.

It can cause killer cash flow problems which is a common reason for business failure, meaning no matter how the good the business idea, product, service or entrepreneur may be, you are ultimately doomed for failure. So how can you effectively manage your late paying customers? What steps can you take to improve your cash flow?

Getting organised

The first step in managing late paying customers is to make sure you are well organised. This can be done by this by creating an aged debtors list which lists every customer, including their business details, contact information and when each invoice is due to be paid.

This makes is crystal clear when things are meant to be done. You can also add a ‘traffic light system’ which shows which customers are often late, occasionally late and usually on time. This will also aid in deciding which customer can be trusted with longer credit terms.

Get THEM organised

Some customers will not pay their debts until reminded. So through sending regular statements and reminders of payments due to customers, they will be constantly reminded they have a debt to pay.

And if after these regular reminders they are still not getting in touch about what is going on, send the ‘seven days’ notice’ letter to threaten them with court action – but keep this to customers who are extremely unreliable as it can affect customer relationships.

Customer relationship management

There are many benefits to keeping a close relationship with customers. It can encourage trust and a ‘partnership approach’ for solving problems discussing the best ways to pay an invoice. Face-to-face meetings are also more personal, giving a better view on what problems the customer may have. For instance, a customer’s clients may not be paying their invoices to a customer, meaning they then cannot themselves. Why not offer to put additional pressure on their client? They are more likely to pay once two companies are pressuring them.

Regular communication also offers the chance to discuss payment options such as discounts for early payments or payments in different intervals, like quarterly payments rather than monthly. These can lead to neutral advantages for both sides – a partnership approach.

External company controls

Looking past effective organisation and relationship management: a way to overcome problems brought about by late payments and long credit terms is to look to outside help. Although bad debt insurance will add to the monthly costs of a business, it may work out to be worthwhile if unreliable customers are involved.

However, perhaps one of the best options to use is invoice finance. Invoice factoring and invoice discounting are two ways to collect around 90 per cent of the invoice value, often within 24 hours. This is done through an external company buying the invoice (invoice factoring), giving up to 90 oer cebt of its value and the factoring company takes the debt on themselves.

Invoice discounting differs from this as the business is left in charge of collecting the invoice debt to be paid back to the discounter at the agreed time – this is much like securing a short term loan with the value of the invoice proving that the company can pay (without the high interest rates).

Managing late payments is vital to control if businesses want to reduce the impact is has on cash flow. And whilst being well organised and keeping a good relationship with customers will aid in the on time of invoices, external options can offer.