Ask any small B2B marketplace owner or self-employed merchant and they will tell you that dealing with late and missing payments is a tricky process. On the one hand, you want – and need – to collect the money owed to your business, but on the other is a desire to keep the peace within your commercial relationships.
If this sounds familiar, you’re far from alone. According to a joint report by Pay.UK and the Chartered Institute of Credit Management (CICM) published in September 2021, 51% of Britain’s SMEs are impacted by unpaid invoices. With a collective debt worth £17.5 billion, each of these businesses is owed an average of just under £20,000.
Read on to learn more about:
- How late and nonpayments can affect your business
- How to deal with late and missing invoice payments
- How Hokodo’s Buy Now, Pay Later solution could help
How late and nonpayments can affect your business
Unpaid invoices often have serious consequences. Below we explore some of the negative knock-on effects of late or missing payments and how they can impact the health of your business.
When invoice payments don’t come into your business as expected but expenses continue to come out, accounts will start running low and cash flow problems will occur.
At this point, cash set aside for investing into products and services has to be diverted to fund outstanding trade receivables, ultimately stifling growth. Businesses are also forced to use time and resources chasing payments that could be better spent pitching to new clients, designing new products or otherwise growing their offering. In fact, 11% of SMEs struggling with overdue invoices have been forced to hire a new employee dedicated to chasing payments.
Struggling to pay bills and expenses
Cash flow issues can also have a detrimental effect on the ability of a business to keep up with committed costs.
Key outgoings are likely to include staff wages, rent or mortgage payments, utilities and, of course, payments to your own business suppliers. These payments are essential, so business owners with outstanding invoices will often try to reshuffle cash and resources around to cover them.
According to Bacs, “a quarter of small business owners [...] have been forced to pay their own suppliers late”, and 28% have reduced their own salaries to cover costs.
Lack of confidence
A position of negative cash flow is not a secure one for a business owner to be in. As we have covered so far, when you are a victim of late and missed payments you have less cash to spend on the things that matter, and growth is a steeper climb than usual.
Finances have a big impact on all your business decisions, and uncertain or insufficient cash flow creates shaky foundations on which to build success. Not only will this impact your own confidence as a business owner but the integrity of your organisation may be called into question by your stakeholders, partners, suppliers, customers and staff.
It’s often said that the majority of small businesses fail within the first 5 years of trading, but why? A 2020 study found that 82% of the time, poor cash flow management and understanding is the primary reason for businesses going bust. In the UK, the Federation for Small Business (FSB) estimates that 50,000 small businesses fail every year due to owed payments which could have otherwise kept them afloat.
This obviously has a major impact on the economy, with the FSB estimating a cost of up to £2.5 billion in bad debt that will never be paid – not to mention scores of job losses each year.
Ultimately, unpaid invoices can directly lead to insolvency, but it doesn’t have to be this way.
How to deal with late and missing invoice payments
If you can improve the chances of getting invoices paid on time and recover nonpayment easily, your cash flow – and therefore your business – has a much better chance of staying healthy. Here’s Hokodo’s tips for preventing and dealing with late and missing invoice payments.
Practice strict credit control
One of the most effective ways of preventing nonpayments and bypassing subsequent cash flow issues is by implementing strict credit control processes within your business.
The following steps will help put an end to any invoices from falling through the cracks.
- Ensure all due diligence is carried out on prospective business customers before you start selling to them. This includes running a credit check and looking into their reputation as a buyer.
- Make use of automated accounting software that can monitor and track all invoices your business sends. This will help you to know when invoices are due, which clients are persistent late payers and when to chase for payments.
- Set out clear payment terms specifying due dates, when you will chase for payment, any interest you will charge and so on.
- If a customer is not trusted or a particularly large order is placed, up-front payment, partial payment or a deposit could be requested.
- Send invoices out as soon as possible once orders have been fulfilled and schedule a polite reminder on or just before the invoice due date.
- Cultivate a good working relationship between your own credit control team and that of your customer.
Top tip: anything that can be automated, should be. This will help to prevent manual errors that lead to delayed or missed payments.
Make payments easy
Another way to significantly reduce the likelihood of having to deal with an unpaid invoice is by providing your customers with access to easy payment options in the first place. By offering the payment options your customers find most convenient, you’ll be more likely to get paid on time.
The ideal payment options to offer will vary depending on factors such as order value, frequency of purchase, industry and geographic location. If you’re unsure, simply ask your customers about their preferred way to pay.
Collect with consideration
If an invoice due date has passed and payment has not been made, it’s time to get in touch with your customer.
Out of fear of losing business, some merchants and marketplaces are hesitant to pester clients for payment. This is especially true during the early days when business and relationship foundations are still being laid. However, there is a way to chase payments without chasing your customer away.
Initial contact can be carried out via a polite email, casually reminding the customer that payment is now overdue. If no response is received, try calling the company’s credit control department. Many payments are not missed intentionally and this kind of nudge can be enough to get the ball rolling.
Still not getting a response? At this point things can get more formal with a late invoice payment letter or email. In your letter, state that if payment is not received within a set number of days you will begin to charge your customer statutory interest on top of what they already owe.
What is statutory interest?
Statutory interest is the interest you can charge a company when they are late paying for goods or services. For B2B transactions in the UK, statutory interest is 8% plus the Bank of England base rate.
How much interest can you charge on unpaid invoices?
Working out a late payment fee in line with statutory interest rates is simple – check out the example below to find out how.
If you are owed £1,000 by a customer and the Bank of England base rate is at 0.25%:
- The annual statutory interest would be 8.25% of £1,000, which is £82.50 (1,000 x 0.0825 = 82.5).
- To work out the daily rate, divide the annual statutory interest value by 365. In this case, it’s 23p per day.
- So, after 30 days of nonpayment, the customer would owe you an extra £6.90 (30 x 0.23).
If you decide to start charging statutory interest, you’ll need to create and send an updated invoice reflecting any new charges. Note that if a different interest rate is set out in the initial contract with your customer then statutory interest cannot be charged.
Top tip: Did you know that you could save time and resources by automating the entire dunning process? There are a range of software solutions available to explore such as Chaser and Upflow.
Call in the professionals
Another of your options for dealing with late and unpaid invoices is to engage a debt collection agency.
Upon your instruction, debt collectors will do all the heavy lifting when it comes to chasing payments for your business. We’re talking about making calls, writing letters and sending emails – not knocking on your customer’s door armed with a baseball bat. However, this doesn’t stop many small business owners from worrying about the perceived practices of debt collection agencies.
Although debt collectors shouldn’t intimidate your customers, using an external party to chase your late payments still has the potential to negatively impact your commercial relationships. If you do choose this route make sure to partner with a reputable agency known for handling collections with tact and respect.
Using a debt collection service isn’t free, but you’re entitled to charge your customer an overdue payment recovery fee on top of statutory interest to help offset any costs.
Make an online claim for money
If you want to avoid the costs of working with a debt collection agency, you can make a court claim for money instead. You may know this process as taking someone to a “small claims court.”
This service also carries a cost – the sum of which depends on the value of your claim – but is likely more affordable than engaging a debt collector.
Sole traders and companies owed a payment of £100,000 or less can use the service by registering for a Government Gateway account and then completing a short court claims form.
Your claim, including personal details, will be sent to the company owing you money, specifying a date by which they must pay you. If they fail to meet this deadline, the claim can be escalated to court, and you may get the opportunity to ask the court to send bailiffs or even freeze money in the debtor’s bank account.
Although you may eventually get your money, be warned that opting for this route is all but guaranteed to put a firm end to your relationship with this customer.
How Hokodo can help
If none of the above options for dealing with your late and missing invoice payments sound attractive or even plausible for your B2B e-commerce business, we don’t blame you.
From the time-consuming nature of conducting credit checks on all your customers to the uncertainties of putting your debt into the hands of a collections agency – with still no guarantee of payment – there are plenty of reasons why financial leaders and business owners within B2B e-commerce might be seeking a more effective alternative.
Hokodo’s Buy Now, Pay Later solution doesn’t just help you to deal with late and missing payments: it bypasses them altogether. Here’s how it works:
- Your business customers shop as normal and head to the checkout.
- They choose to pay in 30, 60 or 90 days with Hokodo, without having to fill out any forms or wait for the results of a credit assessment. We perform all risk and fraud checks instantly.
- You ship the order and we pay you the full amount upfront.
- Your customer pays us back on their due date – and if they don’t, we handle all collections with tact and discretion in order to preserve your commercial relationships.
All our solutions are backed by Lloyd’s of London, the world’s leading specialist insurance market, so you can focus on growing your business and increasing profits in the confidence that you’re always protected from risk.
Fancy finding out more about how Hokodo’s Buy Now, Pay Later solution can help you to avoid the hassle of late and missing invoice payments? Book a demo today and one of the team will be in touch.