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Late payments: how to collect and avoid them

Last editedMar 20224 min read

Late payments can cause big cash flow issues, and chasing up late payments wastes valuable time and resources within a company. In this article, we’ll go through the best ways to collect any late payments as well as tips on how to avoid them altogether in future.

Late payment definition

A late payment is a sum of money owed to a service provider which is paid after the due date.

Late payments can be caused by a variety of factors, from organizational difficulties to poor cash flow.

How late payments affect business

Late payments can be a real frustration for small businesses. As a direct result of late payments, companies are often forced to pay they bills, wages and suppliers late too. In extreme circumstances, this can effectively bring business to a halt.

Late payments also result in the loss of time and money for a company, who have to dedicate staff and time to sending out late payment letters and potentially pursuing legal action.

How to collect late payments

Successfully collecting late payments will require a firm and professional manner with a mind for negotiating. With that in mind, below are some steps you can take to ensure you receive your late payments.

1. Be prompt and follow up

Tracking receivables is important for being to able to quickly spot a late payment. The sooner you spot it the sooner you can follow up with the customer. There are plenty of accounting software solutions that will enable you to do this.

2. Send a reminder letter

Often, customers pay late due to an oversight on their part, or just general disorganization. Sending them a reminder letter is a polite way to notify them that they need to make the payment as soon as possible.

In the letter, include a clause telling them to contact you to discuss the payment if there is an issue. This gives them the opportunity to come clean about any serious problems delaying the payment on their end. This might save you time further down the line. 

3. Send a late payment letter

If the reminder letter doesn’t do the trick, then you will need to send one that is a little more formal. A late payment letter or email should include the following information:

  • Contact details of both parties

  • Date of letter

  • Payment references, including invoice number

  • Amount owed + any late payment interest or fees

  • A clear explanation that the payment is late and the customer has breached terms of the agreement.

  • Refer to any previous correspondence, including a reminder letter (if you sent one)

  • Explain what your next steps will be, including a final payment date and any consequences of a continued lack of payment, i.e., legal proceedings.

4. Call the client up

If, after 30 days, you have received neither payment nor response from your client, then it’s time to give them a call. Phone calls are harder to ignore than emails or letters, and a direct conversation can be an opportunity for a client to be honest about what’s going on.

What if you're still unable to collect the late payment?

If it’s been more than 45 days, and you are still waiting on your payment from the client, then it’s time to up the ante. Throughout the process, you should always maintain a professional demeanor and avoid getting angry or threatening. The following tips should be your next port of call.

1. Assess the value of the client and the payment

At this point, you need to consider whether the value of the payment justifies the time and resources required to receive it. In some cases, it might be easier (and cheaper) to let the payment go and permanently drop the client. However, a payment of significant value will be worth pursuing.

2. Set up an installment plan

If the client is having difficulties due to a cash shortage, it can be a good option to set up an installment payment plan. This can help clients with financial difficulties manage the payment.

3. Consider accepting partial payment

Again, if the client has serious cash flow problems, your best bet of receiving any money from them may be by agreeing to accept partial payment. While this is far from ideal, it can at least mean that you receive some — or even most — of the payment, and do not have to invest even more resources and finances into pursuing further steps.

If your client is still failing to cooperate, the final step is to pursue legal action. Before contacting a debt collection agency or considering court action, first ask your lawyer to write a demand letter. This is a certified letter which threatens the client with subsequent legal action.

If you still don’t receive the payment, your next options are hiring a collection agency or going to court. Both these options can be expensive, however. Collection agencies will often take a percentage of the money they recover on your behalf. In some cases, this means you will only receive a small fraction of the overall payment. Pursuing a court case can also be very pricey. First discuss with your lawyer whether or not it’s worth your while pursuing a court case from both a financial and time/effort perspective.

How to avoid late payments

Far easier than sending numerous late payment notices and contacting solicitors, is simply avoiding late payments in the first place. Below are some tips on limiting late payments with clients.

1. Set up clear terms in advance

Be very clear with clients about the payment due date and any late payment fees. Clarity and organization is invaluable in preventing late payments.

2. Run a credit check on clients

To ensure a client is both able and willing to pay on time, run a credit check on them before entering into business together.

3. Bill promptly and correctly

The quicker you issue the invoice, the quicker you can expect to get paid. Ensure there are no errors on the invoice and everything is clear too. Any mistakes will inevitably cause delays in payments. The easiest way to stay on top of this is to try an automated billing system, if you don't use one already

Make payments easy with GoCardless

Providing various different payment methods can help make it easier for the client to pay in a timely manner. This may mean automated payments, such as those offered by GoCardless. In fact, a survey of 5,000 SMEs using GoCardless revealed that 85% said they now spend less time chasing payments.  

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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