Late payment or non-payment of invoices can leave a small business with serious cash flow issues. Sarah-Jane Dunhill, debt recovery expert at law firm SAS Daniels, gives her top five tips on how to enter into a relationship with a new customer so all bases are covered when it comes to getting what you’re owed.
A recent survey revealed that a quarter of UK SMEs are at risk from insolvency due to the late payment of invoices. Worse still, non-payment of invoices could lead you to going out of business altogether – particularly as a micro firm – so how can you safeguard yourself from falling foul of this bad practice?
Consider this scenario: you win a new customer so you ask them some brief details – name, delivery address and what they want to order. It’s a substantial first order for your business, just what you need right now as cash flow is a little tight and the new customer’s cash injection will help ease some financial pressure. You arrange for the order to be delivered and the delivery note is signed. The customer receives the goods and you forward them an invoice with your usual payment terms of 14 days.
Two weeks come and go and no payment has been received. There’s been no contact from the customer either. You try calling to chase for payment and no-one answers. You try again the next day and are told that he or she no longer works for the business and the person you’re speaking to knows nothing about the order. They can’t authorise payment and the boss isn’t available.
Sound familiar? Unfortunately, this scenario is all too common, leaving many small business owners with the stress of unpaid bills and limited cash flow to pay staff wages.
To avoid this unwelcome situation, it’s essential that you know who you are doing business with. Here are a number of steps you can put in place to safeguard yourself when entering into a relationship with a new customers:
(1) Know your customers
You need to know who you are contracting with and what its legal entity is. Is it a real business? Is it a sole trader or a limited company? Can you pay the company a visit? Don’t be shy and ask to see ID to prove the company is legitimate. Be nosey, and ask as many questions as you can upfront to ensure you know exactly who you’re dealing with and that it’s a genuine company.
(2) Sign on the dotted line
Protect yourself where possible with a robust set of T&Cs and get the customer to sign a contract. Ensure delivery notes are only signed by authorised individuals.
(3) Do your homework
Make sure your customer is aware of your payment terms and give them a call to ensure your invoice has been received. Get hold of a credit report for the customer to check that they’re likely to remain trading for the foreseeable future and to assess your chances of getting paid. If you’re in any doubt, ask for payment up front before you do business. And once you’ve dispatched an invoice, call the customer to make sure they’ve received it and ask if they have any queries.
(4) Procedures and practices
Make sure your procedures for engaging with a new customer are kept up to date and are followed by everyone in the business.
(5) Keep an eye on your existing customers too
If one of your customer’s businesses starts to show signs of being in trouble, look after your own interests and consider shorter payment terms, set credit limits or ask the business for a deposit or full payment up front if necessary. You could also consider asking for a personal guarantee from a director if you feel it appropriate.
Businesses need to put as much effort into ensuring they get paid as they do into securing new orders and delivery. If all else fails, law firms can be brought in to help recover unpaid debts, however the effective five steps above can help prevent you from falling foul of bad payers in the first place.
Sarah-Jane Dunhill is a debt recovery expert at law firm SAS Daniels.
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