From profitable to struggling: Don’t let invoices go unpaid

For small businesses, an unpaid invoice can turn a profitable month into one where you’re struggling to keep the lights on. On average, Australian supplier invoices are paid 26.4 days late, making them some of the worst payment times in the world, according to a 2017 inquiry into Payment Times and Practices.

Stacey Price is a financial coach at Healthy Business Finances, and she says unpaid invoices can cripple the cashflow of small businesses.

“Most small business owners start their business with limited cashflow and operate on the smell of an oily rag,” Price says.

“One big client not paying on time means business owners need to dip into personal savings to fund the gap.”

So how can small business owners protect themselves against unpaid invoices? Here are a few ways to chase up late payments:

Put it in writing

Make sure your contracts and invoices have clear payment terms in writing from the outset, and you can avoid any ambiguity or confusion when it comes time to be paid.

“Sadly business owners have to prepare for the worst, and terms and conditions or an engagement letter with clear payment terms are a must these days,” says Price.

“Always get these signed by the customer: word of mouth is not enough if push comes to shove. We suggest including a clause that any overdue invoices by 30 days or more will be sent to debt collection and their fees, and commissions and charges will be added to any monies owing.”

Make it simple

Giving clients a simple, straightforward way to pay invoices online can encourage on-time payments, while also helping small business owners keep track of their finances. For Michelle Hargreaves, who owns trade services business That Ladie Tradie, sending online invoices means she can keep track of payments through a mobile app when she’s on-the-go.

“It helps me keep on top of outstanding invoices by reminding me when they become overdue, which is a great reminder for me to follow up,” Hargreaves explains.  

Providing clients with a few different ways of paying their invoice might also help. For example, consider how offering your clients the option to use BPAY™ instead of a direct debit or over the phone payment might help you receive payments.

Find out how ANZ can help you make it easier to receive payments.

Send reminders

A gentle reminder is typically all that’s needed for clients to pay their invoices. When chasing up late payments, Hargreaves says you should have an open discussion to get to the root of why an invoice hasn’t been paid.

“Often for my business, invoices that aren’t paid are a result of circumstance due to third party factors,” Hargreaves says.

“My typical course of action is sending an email reminder, and I’m pretty lucky because the majority of the time they [clients] pay on the first one.”

Small business owners should send email reminders seven, 14 and 21 days after the invoice due date – this can be automated through most bookkeeping software for convenience. If that doesn’t work, a phone call may be the personal touch needed to get those invoices paid.

“I’ll give clients a call and see if perhaps I’ve got the wrong email address or there has been some other issue. For the most part, a call clears things right up and they pay straight away,” Hargreaves says.  

Seek legal help

There are also a number of legal avenues small businesses can explore to recover outstanding debts.

They include:

• Issuing a formal letter of demand, which acts as a final warning before legal proceedings are commenced;
• Filing a statutory demand, which is a formal written request for payment of debts owed, issued under the Corporations Act 2001; and
• Bringing court proceedings – this is a final option if all other avenues of debt collection have failed, and should be considered as a last resort.

Explore financing options

For small businesses looking to cover dips in cashflow, there are a number of financing options available. For example, Hargreaves relies on credit cards to pay the bills and keep the lights on while waiting for invoices to be paid.

“I use credit cards to pay for overheads before invoices are settled, and then as soon as the payment comes through I balance it out straight away,” she explains.

Overdue invoices pose a major challenge for Australian small businesses, but by implementing the above good practices, SME owners can minimise their impact on day to day operations and keep their business moving forward.