When late payment takes place, it is essential that SMEs have a defined collection process to ensure that the payment is collected as soon as possible. The longer the payment remains outstanding, the more likely it will become a bad debt. SMEs may consider the following steps to help with collect late payments as well as to prevent such an occurrence.
1. Regularly following up with the customers
In the present business environment, it is common that invoices have payment terms of more than 30 days or even 60 days. SMEs should remind their customers of their outstanding payments
• Reminding the customers of the due dates.
• Asking for reasons for the delay in the payments.
• Requesting for the anticipated pay dates.
2. Negotiating with the customers to collect late payments
Investigate the reasons why payments are not made. It could be for several legitimate reasons for example like the goods are damaged, wrong items delivered, wrong quantity stated. All these will have to be rectified immediately to ensure that there will be no further delay to the already late payment.
However, in an event that the customer is unable to make payment due to financial difficulties, SMEs may:
• Work out a new payment schedule
• Offer discount incentives for timely payments.
Pursuing payments can be very time consuming and costly so it may be worthwhile to accept whatever the debtors are able to pay in certain circumstances
3. Discontinuing any future sales or services
SMEs should minimise future financial damage by discontinuing any future sales if there is no positive progression on the outstanding payments. SMEs need to send a written letter stating its intention prior to the discontinuation.
The above policy should be stated clearly in either the sales contract or invoices to ensure that your customers are aware of the procedure.
4. Writing letters of demand
SMEs can send letters of demand. The letter will need to summarise all payment details as well as potential legal actions if ignored. It should be written by a reputable third party lawyer with the following details:
• Outstanding invoices
• Action required by your customers
• Date that legal action will commence
5. Deploying collection agency
SMEs may deploy an external collection agency to help collect late payments.
6. Taking legal action
SMEs must be fully aware of the potential costs of taking legal action against the customer as it can be very expensive. The legal fees could end up higher than the value of the invoice unless the lawyers are able to enforce upon the customer to cover all legal expenses as well. This is really the last resort that SMEs should opt for to collect late payments.