Late or missed client payments are frustrating to deal with, though they seem to be a typical aspect of doing business today.
At best, a late payment is a mild annoyance that requires teams to follow up with the customer. At worst, it creates serious financial strain for the seller’s business, with the possibility of disrupting operations.
Delayed payments aren’t unique to one sector or business size. A recent report from PYMNTS states that 93% of companies deal with late payments from customers. Thus, every business should have a plan in place to minimize and address late customer payments and maintain healthy cash flows during a delay.
What is a late payment?
A late payment occurs when a customer fails to send a payment by the invoice due date. Whether intentional or not, a delayed payment means the seller is left waiting to collect the money they’re owed for delivering a good or service.
Even if the delayed invoice payment results from an honest mistake, it can create problems for the seller and damage the client-vendor relationship.
As a result, the seller may end up wasting resources trying to track down payments, have troubles meeting their own obligations, or lack the sufficient cash flow to invest in growth opportunities.
Common causes of late payments
Clients might pay an invoice late for a number of reasons. Here are some of the potential causes for a delayed payment:
Client cash flow issues
It’s possible that the client is facing their own cash flow issues, and simply doesn’t have the financial means to make the payment. Or, they may prioritize larger invoices with higher late payment penalties, meaning smaller invoices may take the back seat.
This can occur even with clients who consistently make on-time payments. Open communication with the vendor can help both parties come up with a fair resolution.
Administrative errors and oversight
Maybe the client simply misplaced the invoice, recorded the wrong due date in their system, or honestly thought they had already made the payment. Even though these are generally honest mistakes, it’s still their responsibility to pay the invoice by the agreed-upon due date.
Disputes over services or products rendered
In some cases, the client and vendor might have unresolved issues with the delivered services or products by the time the payment is due. Maybe the client didn’t think the quality of a delivery was up to par, or the wrong shipment was made.
Either way, the client may choose to withhold the payment until the pair come to a mutual agreement on how to proceed.
Strategies for preventing delayed payments
Though late payments are highly common, there are things businesses can do to encourage on-time payments. Here are some of the expert strategies to reduce late payments from customers:
Implement clear payment terms
Though a seemingly basic tip, setting clear payment terms for client invoices can help reduce potential disputes and late payment issues. It ensures both parties are on the same page and are agreeing to the same net terms and timelines.
Any ambiguity in due dates, late penalties, and accepted payment methods can leave room for the client to take their time and make the payment when they get around to it.
Establish strong client relationships
Clients will be less likely to miss a payment intentionally if they’re pleased by their relationship with the vendor and don’t want to compromise it.
If they see a vendor as a valuable resource or partner in their own success, they will be more implored to make timely payments that keep the relationship in good standing.
Incentivize early payments
Offering early payment discounts could encourage clients to pay ahead of the invoice due date. For example, businesses might offer 2/10 net 30 payment terms, meaning the full payment is due in 30 days, but the client can receive a 2% discount if they pay within 10 days instead.
Not only does this help businesses get paid faster, but it also helps to support the client-vendor relationship.
Utilize automated invoicing tools
With manual invoicing and accounts receivable (AR) processes, it’s easier for teams to miss when a client makes a late payment, or doesn’t send the full invoice amount.
An automated AR platform puts the entire process on autopilot, helping teams get paid correctly and on time with minimal manual efforts.
These tools typically make it easier for teams to automate the sending, tracking, and following-up on client invoices. This often includes automated payment reminders ahead of time or nudges after a missed payment, preventing clients from simply forgetting about the due date.
How to address late payments
No business owner looks forward to talking with clients about a late payment. While these conversations can be uncomfortable, and even hostile in some cases, late payments are always a possibility, so teams need to have a game plan for how to address them.
Businesses can take the following steps when a payment is late or delayed:
- Make a formal notice: When the client has missed the due date, send a formal yet friendly notice in writing, either by physical mail or email. Remind them of the due date, the amount due, and next steps if they still fail to send the payment.
- Follow up: Have a structured follow up process if the first notice goes unanswered, continuing to set clear guidelines around when the payment was due, how they can make the payment, and potential late penalties.
- Be flexible: For clients that are open about their financial struggles and have established relationships with the vendor, both parties may be willing to negotiate an alternative payment plan over a longer time period or with lower penalties.
- Escalate as needed: Per the contract terms, businesses may use a formal collections agency or take other legal action for outstanding client payments.
- Reconsider the relationship: After the issue is resolved, businesses may need to re-evaluate their relationship with the client, especially if late payments are a frequent problem. Or, they may choose to continue the working relationship, but charge the client upfront rather than offering services and products on credit.
Maintaining cash flow during payment delays
Just because a business is waiting on a client payment does not mean their existing financial obligations will be put on pause. Companies still need to pay their vendors on time, run payroll, and cover overhead costs to keep operations running.
These are some ways for businesses to maintain healthy cash flows when missing client payments:
Budgeting for potential cash flow disruptions
While easier said than done, businesses should store away capital for a rainy day. Some banking experts say a recommended amount is three to six month’s worth of operating expenses.
Having this cash flow buffer makes it easier to navigate disruptions, no matter if it comes from late client payments or other unexpected cause. It ensures that the business can continue making good on its obligations, even if incoming cash flows are halted or slow down.
Alternative funding options
If needed, businesses may need to seek external capital to fund operations in the meantime. This might be the case if the company works with very few clients, and one missed payment makes a large impact on cash flows and solvency.
Potential short-term solutions include business lines of credit or credit cards. Any type of credit should be used with caution, as businesses will be obligated to pay back any amount they use, and may incur interest and penalties if they miss a repayment.
Get paid faster with BILL
BILL’s automated AR platform helps simplify and automate time-consuming accounts receivable processes, including invoice tracking and follow-ups.
With BILL, businesses can quickly filter all invoices by status to identify late payments, automate reminders, and allow clients to set up automatic payments to avoid missing the due date.
Sign up for a free trial today and see how invoice automation with BILL can help you get paid faster.
FAQs
Why would a payment be delayed?
Customers might miss a payment for a number of reasons, including cash flow issues within their own business or accidental oversight. In some cases, a client or customer will withhold payment even after the invoice due date because they’re disputing the charge or have a problem with the order.
How do businesses avoid delayed payments?
Businesses can encourage on-time payments and prevent delays by offering early payment discounts, setting clear terms, fostering strong client relationships, and implementing automated AR solutions.
How does a business deal with a late payment?
Each business will have their own method for handling late payments. However, it’s common to send a notice of the late payment with the corresponding invoice, use collection services, or come up with an installment plan to help the business collect what they’re owed.
