In the first of its articles for Your Hidden Potential, alternative invoice finance provider MarketInvoice examines the scourge of the business owner, late payments and provides some advice on how to avoid them and ensure prompt payment.
Late payments are one area that MarketInvoice has particular expertise in managing. The online invoice finance platform MarketInvoice facilitates helps growing small and medium sized enterprises deal with long payment terms from blue-chip customers. We are a solution to the problem of late payment but not non-payment. This problem is worse in periods of uncertainty – for example, the eurozone crisis – can often trigger a push by large corporates to lengthen payment terms.
Here is some sound advice to ensure prompt payment and help you maintain positive, flexible cash flow.
- Knowledge of your market and customer
It may be a cliché but it pays to have a good relationship with your client or a representative of that business, such as the FD. That way it will be easier to sort out payment terms and chase any outstanding payments. Just always make sure you don’t let any frustration at a late payment sour these relationships. One problem is that small business owners cannot risk offending their biggest and most important client by ringing up and being terse with the person on the other end of the phone.
- Agree payment terms in advance
By agreeing terms in advance, strategically you can pre-empt cashflow fluctuations and decide on something that suits your business growth plan, maybe even it up in a cheeky contract (if your opposite number agrees.) Of course, some blue chip customers will insist on extremely long payment terms that are standard across the business. If entering into a relationship with exceptionally long payment terms – 90 days is not unusual with supermarkets or high street retailers, for example. It may be worth trying to negotiate a price discount with your client in exchange for faster payment terms. This way, you trade some of your profit margin for prompt, reliable payment. But do be careful to assess different options. Many large customers will ask for rebates for early payment of invoices – if these are 5% or more, you will need to weigh this up with the cost of monthly funding – as this might be a cheaper alternative.
- Prompt and correct invoicing
Anything that slows the payment process or distracts from it could lead to serious problems. It cannot be stressed enough that organisation is paramount. The faster that the billing department generates invoices and sends them to the customer after a product or service is delivered the sooner payment will be received. As obvious as this may be, too many companies will perform such work in batches and it may take them a week or more to invoice their customers. Checkout electronic invoicing and payment tools options that can further speed up the payment process.
Errors in invoicing are a great contributor to long payment cycles. Quoted prices might not match up with master data, and invoices might not include the all-important purchase order number, which leads to an invalidated invoice that might be disputed by the customer. Analysis of such errors can uncover the failures that are driving such mistakes. Simplifying payment terms and controlling other sources of complexity can limit the opportunities for error. Of course, if the client or customer still refuses to pay, that’s a completely different issue.
- Overdue payment? Chase it immediately
Clearly you need to be paid for the service/product you have provided so make sure that you respond swiftly and efficiently if a payment becomes overdue. Remember; heavy-handed attempts at collection & enforcement (especially by third parties) can often backfire on your relationship with your client, especially for small companies with a relationship with large
corporates, this kind of negotiation can be very delicate. Usually, the problem is down to an error in some labyrinth department that your regular contact has no access to within a huge layered organisation. Try to solve things through your regular contact, rather than going over their head and encourage them to talk to relevant staff in payments.
One of the worst steps a small business can take in this situation is to attempt enforcement action: for example, to try to levy statutory interest on an overdue invoice. It is better in the long run to try and retain credit management.
- Dealing with vendor portals – make sure you know how they work
You may be aware that a recent trend for large corporations is to implement online vendor portals where suppliers can log-on, submit their invoices, and check the status of upcoming payments. It’s very important that suppliers know how this system works and understand the right process for accepting purchase orders, issuing invoices, and implementing correct payment bank account details. It is important that you take the time upfront to understand the protocol, avoiding any delays when you are really dependent on receiving the cash to meet your own bills.
- The invoice finance option
A cunning ploy for improving cash flow is to start a relationship with an invoice discounting facility, or alternative finance lender. Recently, factoring and invoice discounting, both forms of traditional invoice finance, have become a major source of working capital. Factoring is a viable solution for late payments; this form of invoice finance converts unpaid or late paid invoices into cash; ultimately raising money on outstanding invoices and advancing cash quickly against them. However there are ongoing monthly service fees that are payable regardless of whether funding was required that month. In addition factoring means that the factor will manage your sales ledger and chase invoices on your behalf. For those who prefer to stay in control of their cash flow and credit management and sell only the invoices they choose to rather than have to sell them all there is an alternative and cheaper solution. With the improvements in technology there are a few innovative online marketplaces for invoices, which enables UK businesses to raise short-term finance or improve cash flow by enabling them to ‘sell’ invoices raised, to investors via online auction.
Some delays in payments – particularly long payment terms – cannot be fixed so easily. As mentioned, long payment terms arise as a natural consequence of being a supplier to a large corporate. Waiting on long payment terms will often retard a business’ growth, especially in fast moving industries where waiting for three months for a big client to pay can be a big drag on their ability to take on new staff, or move up the ladder, dealing with bigger and bigger clients.
Of course, like most advice, it is easy to offer and sometimes hard to follow – all business can benefit from being a little better organised, a little better managed or having a better relationship with suppliers.