Late payments are estimated to cost the UK economy around £2.5bn a year. The Federation of Small Businesses (FSB) also estimates that one in three payments to small businesses are late, and entrepreneurs spend an average of 1.2 days every month chasing late payments. It’s not a pretty picture, and with rising levels of mental illness and depression to boot, the added worry and burden of managing the impact of late payments on cash flow is something small business owners can no longer afford to take a gamble on.
But why does the late payment culture continue to be such an issue for small businesses? To be honest, it’s nothing new and late payments are affecting small businesses from both the top-down and the bottom-up. As entrepreneurs, we are all too aware of the damaging effect that the late payment of a large account or customer can have on our cash flow. To make matters worse, we also know that small businesses supplying services to larger organisations are often at the mercy of procurement departments and complex invoicing protocols.
Issuing an invoice vs. maintaining relationships
On the flip-side, small businesses serving certain markets are hampered by more relaxed invoicing procedures, not to mention working with companies that simply don’t have the cash to deploy the bespoke e-commerce and payment platforms that small business owners need to ensure invoices are paid on time. Some markets, where small or micro businesses target the consumer directly, are only just moving towards digital payments and invoicing. In some cases, these small businesses are still suffering the hangover of ‘cheques in the post’ and cash deposits.
In a service industry where relationships are central to success, using rigid payment systems can feel like a scary step forward for a small business owner that prides themself on keeping contact and processes personal. Yet in contrast they also fear they are losing out to competitors that offer more flexible payment and contact options. It’s the one of the small business conundrums that is creating a real cash flow and admin nightmare for many entrepreneurs today.
Chasing overdue payments
Most small businesses have a human face and for late payments, this can often be where the challenge lies. As a customer, we often know the people that run the business and we also know that that person has a vested desire to keep us happy and the ability to be flexible in order to win and retain our business. In truth, this all stems from a pleasant and healthy place of negotiation, trust and relationship bonding. If you think about it, it’s far easier to ask a person a favour than it is to ask a computer or an employee tasked with the scripted ‘computer says no’ line.
In a world where innovation and disruption is affecting almost every industry, not having the capability to invest and react quickly means many businesses are already at the mercy of their competition. Small business owners spend many hours every week on admin alone (plenty of reports out there will confirm that). Whether it is managing their cash flow and outstanding invoices, chasing payments through various channels, or keeping on top of bookkeeping, it’s a massive time drain and could be spent on better things.
Lost time is probably the biggest casualty of late payment culture. Vital time that could have been spent on marketing, business development and building greater customer engagement is wasted, whilst businesses with slicker processes and a healthier cash flow can naturally afford to move more quickly on opportunities and to experiment with new ventures.
Late payment casualties
So, how can a small business owner react and deal with the issue of late payments? Really, that depends on the nature of their business, as there are a lot of things to consider. Ask yourself, should you offer your products or services in the absence of getting payment up front? It’s an obvious one, but consumers are very much accustomed to making payments online today. If you run a small business that is still accepting cash payments there are now many trusted and simple ways of automating payments.
From point of sale card machines to affordable and simple to set up e-commerce platforms, there are a variety of options out there. That said, it is important to do your research and gather positive feedback and reviews to give customers confidence in your products and services.
So, what steps can an entrepreneur take to ensure prompt payment?
- Late payment fees – from the outset, being open and honest to your customers about late payment charges (and having the confidence to instigate this) should help to reduce the issue.
- Invoice via multiple messaging channels – invoicing via SMS can be incredibly successful for small and micro businesses and can be more beneficial than email. Whatever you decide, make sure you manage expectations with your customers early on and then repeat these often.
- FOMO (Fear of Missing Out) – although not suited to every industry, this is a classic sales technique and can be incredibly powerful in business. Carefully using language and prompts that give a sense of ‘scarcity’ whilst urging customers to confirm their intentions or interest with a payment, can have a big impact on the payment cycle.
- Use the right mix of communications and technology – using fit for purpose technology to manage late payments is important but it’s just one part of the answer. The rest comes down to customer experience. Getting the right balance of technology and communication to encourage payment will depend on the circumstances and the relationship you have with your customers. To deliver the right experience, ask questions like, should it feel more or less personal? Are they making multiple or repeat purchases? Are they making small or large value purchases?
Lost time is probably the biggest casualty of late payment culture. Vital time that could have been spent on marketing, business development and building greater customer engagement is wasted.
Chasing payments is worse than ‘no payment’
Many small business owners worry about damaging customer relationships by chasing payments - it’s a common concern. The irony is, for many business owners, the prospect of chasing payments is actually worse than no payment. Business owners can however, be more assertive by simply removing the human element from the booking and payment process. Introducing an automated system, for instance, that deals with customers on your behalf means they will be less likely (or less able) to ask for relaxed payment provisions.
The rise of self-service checkouts, online shopping, and the boom in e-commerce in the SME sector has paved the way for consumers to self-serve as standard. Small business owners can therefore focus their time on building relationships through other channels and touch points in the customer experience rather than via the payments process.
From a technology perspective, the number of online payment technology providers continues to increase, offering increasingly simple technologies for online payment or even at point of purchase. Both Apple Pay and Google Pay are also making it easier for developers to build their payment solutions into proprietary technologies which, ultimately, makes things easier and more likely that customers will pay on time.
Courage and conviction will win
It’s frankly unacceptable that we still live in a world where the late payment culture is as common as it ever was. Many are suffering at the hands of tardy finance departments, over-complicated protocols, relaxed invoicing approaches. Some just simply dread the whole idea of chasing payments from customers. Either way, small business owners can make their lives easier by taking small steps early on, communicating with their customers about those steps and having the courage and conviction to see them through.
About the author
Nikki Th’ng is the Co-Founder of ClassForKids, a cutting-edge online booking and payment system for the children’s activities sector. Used by parents, clubs, coaches, class providers and children’s franchises across the country, the modern platform is simple to use and designed to save parents hours of time on organizing, booking and paying for their child's activities. The platform also saves businesses time and hassle on taking bookings and payments, communicating with parents, issuing invoices, managing registrations, class schedules and waiting lists.