Small and mid-sized businesses often deal with late payments which can be a frustrating experience. Late payments occur when customers fail to pay their bills on time, leaving you struggling to maintain cash flow and day-to-day business operations.
In this article, we will explore what late payments are, the impact of late payments on SMBs, and provide 10 ways to avoid and solve them.
What Is Late Payments?
A late payment is the duration of time between a business receiving an invoice and making the payment. The delay may be purposeful, could be due to the business needing to verify invoice accuracy or wait for a more opportune time to pay.
However, late payments can also lead to issues with the business’s cash flow, particularly in industries where supply chain challenges and rising utility costs reduce profit margins.
Many industries use net 30 invoice terms, giving customers 30 days from invoice receipt to pay.
How does Late Payments Affect SMBs?
According to Xero, roughly 50% of invoices issued by SMBs were paid after the due date, and 8% were paid over a month late.
Irrespective of the cause of late payments, they can have a severe impact on businesses.
Impede Cash Flows
One of the most obvious effects of late payments is that they impede cash flows. Cash flow is the lifeblood of any business, and when payments are delayed, it can make it challenging to meet day-to-day expenses, such as payroll, rent, and supplies.
Halt Business Operations
In some cases, late payments can be so severe that they halt business operations altogether. For example, if a business is unable to pay its suppliers, it may not be able to receive the goods necessary to keep operations running smoothly.
Impair Business Relationships
Another consequence of late payments is that they can impair business relationships. Late payments can strain relationships with suppliers, customers, and even employees. This can lead to a loss of trust and respect, which can be difficult to repair.
Hamper Credit Rating
A poor credit rating can have significant consequences for a business, making it challenging to obtain loans, credit, and insurance in the future.
Stunt Business Growth
Finally, late payments can stunt business growth. When cash flows are disrupted, it can be challenging to invest in new products, services, or equipment. This can limit a business’s ability to grow and expand, potentially resulting in missed opportunities.
10 Ways to Avoid and Manage Late Payments
There are several ways businesses can avoid and solve late payments. Here are 10 ways to do so:
Assess Customer Creditworthiness
Evaluating customers’ creditworthiness is a proactive strategy to mitigate late payments. By assessing their ability to pay on time, their credit report, and payment history, SMBs can identify potential risks beforehand.
Utilizing credit reports from credit agencies such as Experian and Dun and Bradstreet can help you evaluate a customer’s creditworthiness. Set appropriate payment terms based on the information to reduce the likelihood of late payments.
Analyze Current Cash Flow Performance
To prevent late payments, it’s crucial to analyze your current cash flow performance regularly. By doing so, you can identify any issues or patterns that may be contributing to late payments. This can help you take corrective action before the situation becomes more severe.
Peakflo’s real-time, out-of-the-box cash flow analytics can help businesses identify late payments before they become critical. This can help businesses maintain healthy cash flow levels and meet day-to-day expenses.
Set Clear Payment Terms at the Start
One of the most effective ways to prevent late payments is to set clear payment terms at the beginning. Be specific about when payments are due, how they should be made, and what happens if they are not made on time. Also, having a well-documented record of the agreed-upon payment terms is crucial. This can help avoid confusion and ensure that customers understand their obligations.
Automate Reminder Communication
Following up on every customer via phone, letter, fax, or email, is crucial to ensure timely payment. Keep a steady line of communication with your customers at every stage of the project. Regular check-ins are crucial to avoid any unexpected issues when it’s time for payment. Waiting for them to initiate contact is not an ideal option.
One of the most significant challenges faced by SMBs with lean teams is the time and effort required to follow up with customers. To make this process more efficient, consider automating follow-ups. Use Peakflo to send automated payment reminders and invoices to customers, which can help reduce the workload on your team and improve the likelihood of on-time payments.
Make It Easy for Customers to Pay
Another way to avoid late payments is to make it easy for customers to pay. Provide multiple payment options, such as online payments, ACH, bank transfer, or credit cards, to give customers flexibility and convenience.
With Peakflo’s customer portal, SMBs can provide their customers with a user-friendly platform to make payments using their preferred method. The portal allows customers to view and manage their invoices, set up automatic payments, and receive real-time updates on their payment status.
Offer Early Payment Rewards
Another effective strategy to avoid late payments is to reward early payers. For example, you could offer a small discount for customers who pay their bills early. This can incentivize customers to pay on time, improving your cash flow and reducing the likelihood of late payments.
Once your customer makes a timely payment, express your appreciation by reaching out to them. Consider providing perks like exclusive discounts, priority service, or an invitation to a VIP event. A small gesture of gratitude goes a long way in fostering good customer relationships.
Tighten Collections for Late Payers
For customers who consistently pay late, it’s essential to have a tight collection strategy in place. This may include sending reminders, charging late fees, or even taking legal action if necessary. By being proactive, you can reduce the likelihood of late payments and ensure that you get paid on time.
Peakflo’s Collections Task Management Solution offers a customer status tracking report that provides valuable statistics on payment behavior, enabling businesses to create tailored workflows based on an escalation matrix. This targeted approach can help businesses optimize their collections process and improve payment collection rates.
Resolve Disputes Efficiently
Disputes over the quality of goods or services provided can sometimes lead to late payments. To prevent this, it’s essential to resolve disputes efficiently before the due date. This involves communicating with customers to find a mutually acceptable solution, or even offering refunds or credits if necessary.
Peakflo’s Customer Portal enables your customers to easily raise disputes against a specific invoice with customizable dispute reasons and the right stakeholder at your organization will be instantly notified. It allows you to view, investigate, and resolve disputes before the due date and expedite the payment process.
Improve Customer Communications
Optimizing customer communications can prevent late payments by setting expectations and maintaining open communication with clients. Personalizing communications and addressing customers by name can build positive relationships and improve payment processes. Early warnings of potential late payments and disputes can also be identified and resolved efficiently through effective communication.
If you’re unsure what tone and voice to use when reaching out to your customers, use our free templates so you can collect payments confidently and faster.
Automate Time-Consuming Processes
According to multiple surveys, over 40% of businesses typically don’t have enough time to follow up on late invoices and other unpaid resources.
Consider automating time-consuming processes to reduce the workload on your team. Utilize solutions like Peakflo to automate invoicing, payment tracking, and other administrative tasks. This can free up your team to focus on more important tasks, such as improving customer relationships and maintaining sustainability.
What Causes Late Payments?
Late payments are often caused by human error, rather than malice or bad intentions.
Common reasons for late payments include:
- Lost or unreceived invoices
- Clients mistakenly thought they had already paid
- Cash flow or financial problems
- Disputes over the quality of goods or services
- Errors within invoice details such as typos
- Lack of understanding between the supplier and customer
How Many Days of Late Payment?
The number of days of late payment can vary depending on your payment terms and conditions. Typically, a payment is considered late if it is not made within 30 days of the due date. However, you should specify the payment terms in your contract or invoice to ensure that customers understand their obligations and to avoid confusion.