Preventing late payment

Late payment of invoices by customers can cause major problems for your business. At best, late payment harms your cashflow and increasing your financing costs. At worst, late payments can turn into bad debts or even push your business into insolvency.

While actively chasing debts can help, preventing late payment in the first place is the ideal solution.

Credit checking and credit control

Late payment is often the result of offering credit to customers who either suffer from their own cashflow problems or make a habit of delaying payments to suppliers.

Effective credit checks can help weed out these problem customers so that you do not offer them credit in the first place. Before offering credit, you should ask the customer to complete a credit application. Take steps to assess the customer’s creditworthiness, for example using credit reference agencies, company searches and checking whether there are any court judgments against the customer.

Only offer the customer credit if the credit checks are satisfactory. Even then, you should protect yourself by setting a credit limit that does not expose you to excessive risk.

Payment terms and conditions

Before accepting any orders, you should ensure that your terms and conditions form part of the contract. For example, you can draw your terms and conditions to the customer’s attention by including them on the credit application form and asking the customer to sign as evidence that they accept the terms.

Make sure your terms and conditions clearly spell out when payment is due and what will happen in case of a dispute: for example, if a delivery is incomplete or contains faulty goods. Agreeing a dispute resolution procedure in advance can help minimise costs if a dispute does arise. It’s also worth highlighting your legal right to claim interest on overdue payments.

Invoicing and late payments

Minimise the risk of disputes by taking care to fulfil orders accurately. Where possible, get documentary evidence that orders have been completed: for example, by asking customers to sign a delivery note confirming that the goods have been received in good condition.

Invoice promptly and send out regular statements updating customers on their outstanding balances. It’s worth asking them to explain their payment systems to you – for example, if they have a cheque run on a set day each month – so that you can get invoices and statements to them before any deadlines.

If any payments do become overdue, your system for chasing debts should automatically come into play. While customers have overdue balances outstanding, you may want to restrict further credit sales.