UK SMEs account for 99.9% of the business population, three-fifths of employment (16.8m), and around half of the turnover (£2.3tn) in the UK private sector. Despite this, they are at the bottom of the pile because they don’t have the resources to fight back.
Here at Juno, we’re on a mission to solve this crisis, support cash flows, and ensure SMEs survive and thrive into 2021 and beyond. We’ve been talking to thousands of SMEs across the country to understand their payment challenges and crowdsource hints, tips, and best practices to help SMEs get paid. We’ve analysed and compiled the 10 most common themes for you below:
1. Agree upfront payment terms, deposits or retainers
Make the case for complete or partial upfront payments before any work is done, or at a bare minimum agree on a retainer or funds on account to kick off a project. A good tip is to negotiate a small discount for early payment. Deposits and retainers become increasingly important for larger value orders or engagements.
2. Be firm upfront and integrate late payment penalties
Explain at the outset of any relationship that you expect to be paid on time, and due to past experience you charge fees for late payments, which you need to put in your contract and invoices. Discuss this in a firm but fair way, and always explain why cash flow is vital for you as a small business. Make sure at this point you get a confirmation from your client that they will pay on time.
Unsure on how much charge? The statutory interest you can charge a business for paying you late is 8% plus the Bank of England base rate.
3. Invoice immediately and frequently
Invoice immediately after the job is done, or if it is a project spanning multiple months, invoice regularly e.g. on a monthly basis. Doing this makes a significant impact on the speed of payment due to the workings of the human brain
In scientific terms this is called recency bias if you want to look it up.
4. Automate and chase
Use software or schedule emails to send out payment reminders. Hubspot is a free tool you can use for this, but there are many others. We recommend sending reminders one week before, a day before, and on the day the payment is due. If you don’t receive that payment on the specified date then give your client a call, and agree on a timeframe for payment and some credit terms for their payment. You can even hire a virtual assistant from companies like Remote Bob to do some of this legwork for you (but this is when chasing will start costing you money!)
5. Track and review payment patterns for existing customers on a monthly basis
This will help you identify any changes that might signal a potential problem. For example, if a customer who always paid on time begins to pay later and later, it may signal financial distress, and you will want to reevaluate their terms and credit limits before things get out of hand.
When negotiating new terms, try to be understanding and flexible with fellow SMEs during these trying times!
6. Diversify your customer base
Having a large and varied customer base means that a payment problem with one customer, or groups of customers does not put the company at risk. Like investing, diversification of customers means you hedge against specific political, economic, or industry issues that could put your whole customer base into financial distress.
7. Turn your invoices into instant capital
Yes, you heard right. There are a variety of platforms (e.g. Market Invoice) that allow you to borrow capital against your unpaid invoices, or buy your invoices off you for a small percentage of interest against the total invoice amount. You need to be careful with invoice factoring as it artificially manipulates your cash flow position.
8. Optimise your accounts receivable process
Make sure your account receivables process is optimised and tech-enabled, so you’re not repeating manual tasks frequently. It’s worth taking a day to set it up early to save the ongoing pain later. There are thousands of tools out there that you can choose from for each sub-section of the process. Some of the most common are the cloud accounting packages like Xero, Quickbooks, and Sage.
Top tip: offer multiple payment methods in your invoices to give your customers a choice.
9. Know your cash flow and build up a cash reserve
Make sure that either you or your accountant has a firm handle on your financial position, what levers can be pulled, and what challenges could emerge. Planning for the worst and hoping for the best is a prudent strategy. As with personal finances, during the good times try to build up a cash reserve that you can use to insulate your company from the inevitable challenges that hit.
10. Deny services
The last weapon in your armoury is to deny the customer any ongoing services or new orders and withhold the handover of deliverables until an outstanding invoice is settled. Be mindful that if your customers are also SMEs it may not be out of choice but instead situational so just communicate and be transparent with each other.
We hope that was helpful. There is plenty more to come. You can find out more about Juno for business here.