What can I do about late payments?
Late payments are an irritating but inevitable factor of running a start-up business. You can never completely prevent sluggish payments from customers, but there are some steps you can take to minimise your exposure to them.
While the odd late payment can be tolerated, a series of missed deadlines can break your business. Prompt payment is essential to your cashflow so make sure you are well equipped early on.
Firstly, run credit checks on your main customers or those you’re about to enter into agreements with. How reliable have they been with previous suppliers? If there’s a string of debt behind them, be wary about offering them your goods or services.
Set out clear terms of conditions and clearly clarify these to customers. Your payment terms should be obvious to customers and you should be firm about your willingness to take action should these terms be ignored.
Get to know your most prominent customers and understand how they operate. Try to keep lines of communication open and send prompt invoices that are in sync with their own cash flow situation. Having flexible systems can eliminate problems down the track.
If payment is late, politely but firmly ask for it to be honoured as soon as possible. Don’t be nervous about asking for payment – the debtor is in the wrong here, not you.
If you can’t reach an agreement, consider using a solicitor or accountant to help out. A debt collection agency may also be useful. If, as a last resort, you do end up in court, small claims can be made relatively cheaply, but it could take time. For example, VCAT, which deals with consumer disputes in Victoria, has a seven-month waiting list.
“Have clarity around terms of trade, have them in writing and give deadlines, such as 60 days,” advises Paul Clements, principal at business advisory firm Clements Dunne & Bell. “Don’t allow customers to get away with late payment. Be firm and charge interest and seek costs that you’ve incurred. On the other hand, offering incentives for early payment can also work.”
The Federal Government’s rules on interest means that for payments under $1 million, you can charge a daily rate for each overdue 24 hours. At the moment, the daily general interest rate charge is 0.03% a day. Details on the charge can be viewed here - http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/2832.htm