How to get paid on time.

Good credit control doesn't just happen. Here's how to make sure you have an effective system in place to get paid on time if you don't get paid upfront.

How to set up a new customer.

Gather comprehensive information about the customer before taking orders. Confirm details such as:

• Trading name and status (e.g. sole trader, limited company, partnership, limited liability partnership or plc).
• The invoicing address.
• Whether they usually pay by cheque or electronically, and when they normally pay bills (e.g. do they do a cheque run on certain days of the month?).

Provide all the information your customer needs to be able to pay you quickly and easily, such as:

• Your bank details for electronic payments.
• Your terms & conditions and payment terms (ask your customer to sign them).

If you are negotiating a credit agreement:

• Ask for, and follow up, references from some of your customer's other suppliers. Ask them about the customer's payment track record.
• Check your customer's track record by asking a credit agency for their business credit rating. Remember to gain your customer's consent before this check is carried out.
• Set a credit limit for each new customer and stick to it. Once the customer has proven to be a good payer, you can review the limit.

How to process orders from new and existing customers.

• Ask for an official purchase order or for details on how they organise payments. This is a written confirmation of an agreement to buy something and is often just a reference number. Many companies will not pay your invoice without a purchase order.
• If the company does not issue purchase orders, prepare and issue a confirmation of the order and get the customer to sign and date it. Include a clear description of the product (e.g. size, quantity, type or model, colour) or service (e.g. deadlines for delivery, hourly or daily rates, and whether it includes travel, materials and VAT).
• Record the name of the person placing the order for all telephone sales and follow it up immediately with a written confirmation that they can sign and return to you. Although a verbal contract can be binding, it makes life a lot simpler if you have agreements in writing in case problems arise later.
• If the order or work is to be staged, suggest that customer sets up a standing order or direct debit. Obtain copies of the necessary forms from your bank and have them with you to help you complete sales.

Good practice for invoicing customers.

• Invoice as soon as possible after you have completed the job or delivered the goods. Don't wait until the end of the month.
• Make invoices clear; include a description of the product or service, the person who requested the work, the date of invoice, the invoice number and the date you expect to get paid.
• Include the customer's purchase order number or a copy of the signed confirmation sheet.
• Include clear contact details so customers can get in touch easily if they want to query anything.
• Check each invoice before it goes out for errors or omissions. Make sure everything you have invoiced for has in fact been delivered.
• Consider calling a few days after invoicing to check it has been received.

How to deal with late payments.

Chase payments as soon as they become overdue. You may want to prioritise high-value invoices first. Start with phone calls and progress to letters when chasing late payments.

On the phone:

• Make the first call and ask in a friendly, polite tone when you can expect to receive the overdue payment.
• Log every phone call and other contact you make chasing the payment, noting down who you spoke to, the time and date of the call, and details of the conversation. Confirm every phone call in writing.
• Keep an up-to-date list of debtors at hand so you know when each debt becomes due. Then, if the customer calls to place another order, you can use this as leverage to ask for payment on the outstanding one.
• Be careful to strike a balance between actively pursuing the debt and not harassing the debtor which may in turn cause you issues legally.

If phone calls get you nowhere, send a letter:

• In your first letter, state that you are disappointed not to have received the payment as promised by the customer in your telephone conversations. Draw attention to your terms and conditions regarding payment, which the customer agreed to. This letter can be sent a week after payment was due.
• Don't let emotions get in the way - maintain a businesslike tone in all letters.
• If a second letter is needed, make it firmer. Explain politely that if payment is not received within, say, seven days, you will have no alternative but to place the matter in the hands of your solicitor. Include details of each phone call you have made and reminder letters you have sent.
• A third letter would inform the customer that you have now put the matter in the hands of your solicitor. Send this letter if the customer doesn't meet the deadline you outlined in the second letter.
• Do not make idle threats. If you have said you will put the matter in the hands of a solicitor or debt collection agency, do so promptly.
• Remember it is illegal to harass debtors for payment. You cannot, for instance, advertise late payers in your shop window.

If you have to pursue the claim through the courts you stand a very good chance of recovering the debt and the cost of the action if you have followed a robust process and have all your documentation in place.

Interest and late payment.

Businesses are entitled to claim compensation when a debt remains unpaid after the date specified in the contract, or in the absence of a contract, 30 days after the delivery of the goods or service.

It is good practice to state the interest rate you will charge on late payments within your contract and you should charge on while the outstanding debt (including any element of VAT). Be mindful of any restrictions on the charging of late interest including whether this could be seen as a form of penalty.

Decide whether you intend to charge all your customers interest on late debts or just the one or two that regularly fail to pay on time and then forewarn customers that it is your policy to claim interest on late payments.

Managing risk.

However effective your system is, it will not be risk free. You should avoid large exposure to any one or few customers. Consider whether any of the following ideas might work for you:

• Try negotiating part-payment in advance, with the balance payable on delivery. Maybe offer a discount for this or an extra service that your customer will value but which costs you little.
• Issue interim invoices at the end of each week/month for long-term contracts. State clearly that they are for part-delivery or work in progress.
• In service-based industries you may be able to negotiate a retainer. This may be a closed retainer where both parties agree a list of projects to be completed during the term of the retainer. Or choose an open-ended retainer where services are provided on an as-required basis.
• Consider credit insurance, which insures against bad debt within given credit limits.
• Consider factoring if you have a lot of regularly overdue debts. Factoring companies advance you a percentage of the cash - usually between 75% and 90% - when you issue your invoice. The balance, less the factoring company's costs of around 1.5% to 3.5% plus interest, is paid to you when the debt is recovered in full. You get the benefit of cash sooner and the greater influence of the factor to chase debts.

Find out more about our Invoice Finance (Factoring & Invoice Discounting) service.

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