Dealing With Slow Payers: Would a ‘Late Payment Tsar’ Benefit Your Business?

Late payments can create a cascade of problems for small businesses. When a client doesn’t pay on time, a small business owner may have trouble making payroll or paying taxes. The business may even fall behind on its own bills, which will hurt its business credit scores, making it more difficult to borrow in the future. And if a key client defaults, it can cause the business to go under.

Late payments are considered such a serious problem in the UK that the government is appointing a Small Business Commissioner who will be charged with tackling this issue head on. ​​​Nearly half of the UK’s small to medium sized enterprises (SMEs) are being paid late, and some 32 percent of those are paying their suppliers late as a result, according to Bacs Payment Schemes Limited (Bacs). Some are skeptical that a government official can change what the government has called a “culture” of late payments, but it certainly brings national attention to a problem plaguing many small business owners.

Late payments are a serious problem here in the U.S. as well. A recent survey by Fundbox found that 79 percent of business owners surveyed said they cut their own pay when customer payments are slow, and 20 percent cut marketing and growth efforts.

Do you wish the U.S. had an official “payment tsar” dedicated to helping businesses like yours get paid on time? While that may not become a reality, you can take proactive steps to help ensure that slow payments don’t threaten the health of your business. These may include:

Incentivize timely payments.

Offering a small discount—say 2-3% of the amount due—for on-time or early payments can encourage customers to pay more quickly in order to save money. Of course, that discount will affect your margins, but since prompt payment can significantly improve cash flow, it may be well worth it.

Line up a backup.

A line of credit, or a low interest credit card, can help bridge the gap if payments are slow. The key is to get the credit card or line of credit before you need it. The old adage that the best time to get a loan is when you don’t need one isn’t so far from the truth.

Of course, this option is not without risk. If your client doesn’t pay, you will still be responsible for those bills, plus any interest charged.

Factor invoices.

Need to get paid faster but can’t entice a customer with a discount? You may be able to factor your invoices. If you do, you’ll get paid a portion of the invoice up front, and the rest—minus the fee charged by the factoring firm—when the customer pays.

Some invoices can even be factored on a non-recourse basis, which means that if the customer doesn’t pay, you won’t be on the hook for the balance. Unlike a loan or line of credit, firms that factor invoices are typically most interested in the creditworthiness of your client that owes you money, and may not even check your personal or business credit.

Develop a credit policy.

If you are providing a product and service before your customer pays for it, you are extending a form of credit. Just like a traditional lender would, you’ll want to develop a credit policy and communicate that to your customers. That means deciding when to extend credit, creating a contract that spells out your credit policy and the cost of paying late. It may also make sense to line up and interview collection agencies or attorneys before you need one. In particular, an attorney may have advice on how to minimize this kind of problem.

Check credit.

Did you know you can check the business credit of your current or prospective customers? A pattern of late payments may be a warning sign that you need to get paid up front or look for a more creditworthy customer.

If you have a customer with no business credit history, you may want to require a deposit and collect payments in regular installments. You can also consider reporting your customer’s payments to business credit agencies. This can help them build business credit, and serve as a subtle reminder that they need to pay on time or suffer the consequences.

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