Does your vision of customer payments involve knocking up a quick invoice, emailing it to them and waiting for the cash to flow in? If so, you could be in for a shock.

Unfortunately, prompt payment of invoices doesn’t happen by magic. It involves developing a good invoicing system and setting out payment terms. Plus, you need to know how to chase outstanding invoices without offending customers.

In this guide, we outline how you can get customers to pay on time. We also explain what to do when payments are still left unpaid.

Payment terms are important because they allow you to state what you expect from your customers when it comes to getting paid.

If you don’t state your payment terms or haven’t thought them through, you risk waiting longer for invoices to be settled. This in turn affects your company cash flow.

What to include in your payment terms

When laying out your payment terms, consider the following things:

• The due date for the payment. This is one of the most important aspects of your payment terms. If you pay your invoices within 30 days but your customers have 60 days to pay you, it could affect your cash flow
• What forms of payment you accept. This might include bank transfer, credit card or PayPal. Include any information customers will need to pay you, such as your bank account details
• Late payment charges. What happens if a customer doesn’t pay on time? Think through how much you will charge and when. This may be on a sliding scale, according to how late the payment is
• What currency you expect to be paid in. This is particularly important if you have overseas customers. Make it clear what currency you expect to be paid in

When setting your payment terms, think about what works best for your business.

Traditional payment dates are 30 days after invoicing, but many businesses are revising this. Many invoices now request payment within two weeks. These shorter payment terms can also lead to quicker payments.

Once you’re happy with your terms, it’s important to communicate them well with your customers. If you’re introducing new payment terms or adjusting existing ones, make this very clear.

You need to give plenty of notice too. Otherwise, customers could plead ignorance when it comes to payment time.

Where to include your payment terms

On your invoices

It’s good practice to include your payment terms on your invoice. They need to be obvious, but not clutter the layout of the invoice. Many invoice templates provide space for your terms. If you’re creating your own invoice from scratch then make sure they’re visible and readable.

On your emails

If your payment terms have changed, make this explicit in your covering email. It can be a good idea to explain your reasons for making changes, in case your customers have any objections.

Does your business send out regular company emails to clients? If so, this is another opportunity to explain your payment terms.

An ad-hoc invoice system might work when your business is small. But as you grow, it’s best to develop a proper system. That way, you can save on admin time and receive payments sooner.

It might help to use billing software. This allows you to create invoice templates and automate regular invoices, so you don’t need to create them manually each time. You can also set reminders for overdue payments and thank you emails for payments received.

Even if you don’t use billing software, setting up your own system will keep you on top of your accounts. It could include invoice templates and calendar reminders to chase late payments.

Strong customer relationships are fundamental to being paid on time. You can automate a large part of your system, but a human touch can stop you running into problems later on. It’s much easier to ignore an anonymous reminder than a personal phone call from a friendly member of your team.

Here are some tips on developing good relationships that encourage customers to pay on time:

• Make a contact in their accounts department to deal with personally
• Address all your correspondence to your contact and always ask to speak to them directly when contacting them by phone
• Find out what they need from you to process the payments. Some companies require certain information on their invoice. Make it easy for them to pay quickly by providing exactly what they need
• Discuss and agree your payment terms. Talk them through the terms in person and address any concerns they have up front

Asking for money is never nice. But if you follow a well-planned procedure, it’s easier to tackle the situation with confidence.

Start by producing an effective debt chasing process. This will be different for every business, but having a payment timetable allows you to keep tabs on all payments that are due. For example:

• Invoice date is classed as day one
• First automated reminder two days before payment is due
• Second automated reminder two days after payment is due
• Personal email addressed to your named contact five days after payment is due
• Personal phone call to your named contact seven days after payment is due

Escalating unpaid invoices

Even after issuing reminders, some invoices will still go unpaid. So what happens next?

There are a few tactics you can use to escalate the issue:

• Ask to talk to someone more senior within your customer’s business
• Politely remind them about your late payment fees. State when these will kick in and how much they will be charged
• Explain that you may be forced to stop supplying them until the payment is settled
• Discuss the possibility of an alternative payment plan that works for you both. This could be paying in installments, for example

If these soft touch escalations don’t work, you may be forced to take one of the following courses of action.

1. Find out if they’ve signed the the Prompt Payment Code

Start by finding out if they’ve signed the Prompt Payment Code. This is a voluntary code of practice for businesses to sign. It shows that they commit to paying suppliers on time.

If they’ve signed the code, they should pay small businesses within 30 days. If they don’t, you can make a challenge. This will be investigated by the Chartered Institute of Credit Management.

2. Stop their supply

It can be a drastic measure to stop supplying a customer. It might force them to take their business elsewhere. Weigh up the pros and cons first and only take this action if you’re sure that you don’t mind losing their business.

3. Bring in the debt collectors

There’s nothing like a letter from a debt collector to get things moving. Debt collectors often work on a ‘no collection no fee’ basis. This means that you only have to pay them a proportion of the debt once they’ve collected it for you.

4. Take legal action

If all else fails, taking legal action is your best and final bet. This can be costly and complicated. Make sure you enlist a specialist who understands the way your business operates.