Unpaid invoices can make life as a small business owner tough. It’s particularly frustrating when you’ve had a strong sales period, but slow payment is making it difficult for you to meet your ongoing expenses.
A 2017 government enquiry into small business payment times and practices found that Australian supplier invoices are paid 26 days late on average, making ours some of the worst payment times in the world.
Unpaid invoices can put a significant dent in the cash flow of a small business. Just one large client paying late can have a flow-on effect that puts you under pressure to meet your supplier bills, wage payments and other costs, and may mean you need to dip into personal savings to bridge the gap.
The best way to avoid an issue with unpaid invoices is to prevent the problem from occurring initially. Protect yourself against unpaid invoices by:
1. Knowing who you’re dealing with
Do some research before taking a new customer on. Run a credit check to confirm if they’re good payers and look out for red flags in your initial conversations. With the benefit of hindsight, many business owners report feeling a little uneasy at the start of a client relationship that results in unpaid invoices – something was just a little “off”.
If a potential customer repeatedly mentions having a limited budget, questions your rates or is particularly disorganised, you may want to consider working with them – or at least look at taking payment upfront.
2. Not providing credit terms as standard
There’s no need to offer customers 30 or 60-day credit terms as standard. What’s acceptable will depend to some extent on your industry, but customers should earn the right to favourable credit terms.
If you’re unsure about a new client, you can ask for:
- Payment upfront – for either the total cost or a 50% deposit
- Payment on delivery
- Milestone payments throughout a project (where you’re providing a service)
3. Having a signed contract
A contract doesn’t guarantee that you’ll be paid, but it’s a record that your customer agreed to pay your fee. The contract should outline the product or service that you’re providing, when it will be delivered, and payment terms. You should ensure that all clients acknowledge and sign a contract – it’s a major red flag if they’re reluctant to do so.
4. Making it easy for customers to pay you
Does your invoicing process make it easy for your customers to pay you? Consider offering a number of payment options – there’s direct credit, credit card and PayPal, plus newer services such as Afterpay and Zip Pay that allow customers to pay in instalments. Speak to other business owners in your industry to see what methods work for them.
5. Following your customer’s invoicing instructions
Some customers will have a specific process for submitting invoices to be paid – for example, invoices must be sent to Accounts Payable, CCed to your main contact. Make sure you understand and follow this process to ensure your invoice is dealt with promptly.
6. Charging a penalty for late payment
There are a few different types of late payers – those who are always late, those who aren’t able to pay right now, and those that don’t plan to pay are the most common. Charging a late fee for slow payment obviously won’t help if your customer has no intention of paying your invoice, but it should motivate chronic late payers to pay up by the due date, and encourage those facing their own cash flow problems to move your invoice to the top of the pile. Charging a late fee can feel uncomfortable initially, but if unpaid invoices are putting your business and cash flow under significant stress, it’s a very reasonable tactic.
7. Using a debt collection agency
As a last resort, you may want to consider outsourcing to a debt collection agency. Often, letting your customer know that you plan to pass the matter over to a debt collector to pursue may prompt them to pay the outstanding amount to avoid that happening.
8. Selling your invoices to a finance company
Invoice finance (also known as debtor finance) is a simple way for business owners to take control of their cash flow and access working capital if they’re dealing with a number of unpaid invoices.
Being approved for an invoice finance facility is much more straightforward than applying for a bank loan or overdraft, and there’s no property security required. Once you’re approved, you simply send your invoice finance provider a copy of your customer invoices to access up to 100% of the amount you’re owed (minus fees), often on the same day.
Your invoice arrangement can be visible to your customers, such as in the case of debtor finance where the provider takes responsibility for your accounts receivable process, or invisible (known as invoice discounting), where you continue to perform these activities yourself.
Cashflow Finance has supported Australian small businesses with leading invoice finance solutions for more than 30 years. If you’d like to learn more about invoice finance and explore whether it might be right for your business, we offer a free 30-minute phone consultation. Call us today on 1300 760 205.