Despite taking steps to reduce the incidence of late payments, most small and medium enterprises (SMEs) will be faced with late payments at some point. Having a documented process for dealing with late payments makes the situation much easier to handle so developing a late payment collection process is important for all SMEs. The following steps are the most effective for dealing with late payments and preventing future occurrences.

 

1. Regularly follow up with customers

When payment terms are 30 days or longer, customers may lose track of due dates. The simple act of following up with customers can encourage them to pay and prevent future late payments. An effective strategy for following up can include:

  • reminding the customer of the due date
  • asking for the reason behind a late payment
  • requesting that the customer provides an anticipated date of payment

 

2. Rectify supply deficiencies

If the above process reveals that a late payment was the result of a legitimate supply issue (e.g. the goods were damaged, the wrong item or quantity was delivered, the service was not as described) rectify the deficiency. This should remove further delays and also provides an opportunity to modify processes to prevent a reoccurrence of the same issue.

 

3. Negotiate with customers to collect late payments

In the event a customer is unable to make a payment due to financial difficulties, a payment plan may enable the customer to pay the debt. A discount for future timely payments may also prevent late payments in the future.

If the customer cannot pay the debt even with a payment plan, it may end up being more cost effective to accept whatever the customer can afford to pay given how time-consuming and costly it can be to pursue unpaid debts. This is especially true if the customer cannot pay the full amount due to insolvency or bankruptcy.

 

4. Discontinue future sales

If an invoice is paid exceptionally late or not paid in full, or if a customer continuously pays late, financial damage can be minimised by discontinuing the business relationship. It can thus be useful to include a clause about this in sales contracts. It’s also good practice to notify affected customers in writing prior to terminating any services or ceasing the sale of goods to the customer.

 

5. Write a letter of demand

If a customer refuses to pay an invoice after two reminders have been issued, a business may choose to issue a letter of demand. Such a letter is often the last reminder a business sends to a debtor before taking legal action.

A business can write a letter of demand internally or hire a lawyer to draft it on the business’s letterhead. It is best to address this letter to the owner of the business that owes the money even if the original service or sales agreement was addressed to someone else in the business.

A letter of demand checklist and template can be found on business.gov.au.

 

6. Engage a debt collection agency

Where a significant debt remains unpaid, businesses may engage a debt collection agency to collect the late payment. This doesn’t usually make financial sense for small debts but the expense and effort may be worthwhile for large debts.

 

7. Take legal action

The last resort for a business that feels it really needs to collect a late payment is to take legal action against the debtor. Legal action is usually the last resort because unless the engaged lawyer can force the customer to cover the supplier’s legal fees as part of the legal action, legal fees can easily end up being greater than the value of the unpaid invoice. In such situations, it actually makes better financial sense to write the unpaid invoice off as a bad debt. Going to court over a dispute can also be time-consuming and stressful.

The business.gov.au website has a useful guide to going to court over a dispute that provides information that may help businesses determine whether legal action is the right choice for a given circumstance.

 

 

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