Late payment is an ongoing problem and for many SMEs an unpaid invoice can be the difference between survival and collapse. So, how should SMEs handle a client who doesn't pay on time or simply won't cough up at all?

The outlook for Australia in 2010 is solid, particularly compared to other developed nations. Therefore, the road ahead for SMEs should be easy - right? Wrong!

Cash flow and liquidity are vitally important during a period of economic recovery as firms require funds to take on new staff, increase inventories and invest in their business to meet growing demand. However, Australian firms are negatively impacting cash flow and are hurting the ability of firms' to invest in their operations by taking longer to pay their bills than they did at the end of 2009.

Late payment has been a problem for many years but it really came to the fore during the crisis. Many small businesses found themselves unable to bolster their cash flow by borrowing money and accordingly they began to struggle under the weight of late payments. This situation is continuing now, even as the economic climate improves. Australian firms took an average of 54.1 days to settle their accounts in the March quarter 2010, a figure which is more than three weeks above the standard 30 day term. In addition, 27 percent of firms continue to face difficulties accessing credit.

In this environment, cash flow becomes even more critical. To meet this challenge and ensure the recovery continues to gain strength, its time for Australian executives to get tough on late payment. However, the dilemma many small businesses face is that talking about this issue with clients is often very difficult. Regardless, it is a skill that all business owners should learn and there are a range of ways to tackle the problem and signal to customers that the firm has zero tolerance for poor paying behaviours:

• Upfront payment
• Prompt action
• Late payment fees
• Expert advice

Upfront payment

To avoid late payments some SMEs require upfront payment however, this approach can end up impacting your client base.  Many firms expect credit terms to be part of the service and may opt not to do business with you if you take this approach.

Find out more about extending credit to the right customers >> 

Prompt action

Another way to stamp your no tolerance approach on late payers is to act promptly to chase the debt once it becomes overdue. This means that on day 31 (if your credit terms are 30 days) SMEs should start to chase the overdue account. Issue a reminder which clearly states when you require the payment and if it's not received by your deadline pass it over to a reputable debt collection firm. If this is done before the account gets to 60 days it sends a clear signal to customers that the business has zero tolerance for late payment.  

Want more information on collecting overdue debts or writing a collections letter? Get more advice from Dun & Bradsreet's experts now >>

Late payment fees

A third way to demonstrate a zero tolerance approach is to apply a late payment fee. However, there are a few things SMEs need to consider before they go down this path:

• Do the terms and conditions adhere with any regulation/legislation that applies to the business/industry in which the company operates?
• How will new terms be communicated to existing customers?

This move may result in customer backlash so a business must determine whether they are prepared to lose customers. When making this decision executives must remember that a persistently delinquent payer is a significant drain on internal resources - some customers are not worth having!

Find out more about charging late payment fees >>

Expert advice

Top tips for small businesses facing late payments:

• State your terms: It is important that SMEs state the terms and conditions of payment clearly on the initial invoice so the client knows when you expect to be paid.
  
  
• Get some muscle: Small businesses often lack the muscle to tackle their late paying customers but they can use tools such as outsourcing overdue payments to a debt collection agency. Clients won't want a debt collection agency chasing them so this practice can help small firms to get paid more quickly.
  
  
• Build relationships: One of the problems with late payment is that it's often anonymous. When calling a debtor (particularly if they are a large firm) an SME should single someone out and try to speak to the same person each time. By creating a relationship it make it harder for the debtor to let you down.
  
  
• Assess your position: How important is your company's product to the customer? Can they go elsewhere to get what your business is offering them? The answer to this question will impact an SMEs approach to chasing an overdue debt. If the product or service on offer isn't critical to the customer an SME might not want to push too hard however, a decision needs to be made as to whether having a late paying customer is good for business cash flow.
  
  
• Don't put all your eggs in one basket: Relying on one or two big clients for most of a firm's profits could be a recipe for disaster - if these customers turn out to be late payers cash flow will suffer significantly. To avoid this, SMEs should aim to take on a mix of clients (both small and large companies) so they can spread their risk. It's just not worth taking the gamble on one company no matter how big they are.
  
  
• Quit while you're ahead: Am I still making money out of this client? This is the key question SMEs need to ask themselves when dealing with a late payer. Do the sums and make sure to cut loose if or when it comes to that.

Need more cash flow advice? Get the information you need from Dun & Bradstreet Small Business >>