One tricky part of being self-employed or part of a small businesses is living with the risk that you have delays in receiving payments from your customers or won't get paid at all. This is a very real problem for many, and can be enough to force a small businesses into serious cash-flow issues and even bankruptcy. The key thing is to be as prepared as possible from the outset to minimise the risk that a customer won't or can't pay.
Credit Checks:
There are various approaches you can take to this including:
Credit rating agency: For sole trader customers, you are likely to use their personal credit rating as an indication of their likelihood of paying business debts. Such reports can be easily bought from the main credit checking agencies e.g. Equifax and Experian.
Credit checking agency: Although a relatively high expense compared to other methods, hiring a professional credit checking agency e.g. Graydon, will give you the best assessment of the risk if you were to offer credit to a customer. As this can be expensive, it's only really suitable for significant customers where there is a serious risk associated with their non-payment. Note though, that you can get basic information for free from Graydon and others which can give you a high-level overview.
Supplier and/or bank references
Perhaps one of the most useful tools in checking for likely payment issues is requesting references from the customer's existing suppliers. Ask for specific known suppliers if you can, to avoid the risk that the references are manipulated, and always ensure you get multiple ones to get a full picture. You can also request a bank reference from your customer which would give you some indication as to the credit worthiness of them. All of these pieces of information should help to build up a more rounded and accurate picture of the way someone does business.
Company accounts:
For limited companies, these are available online e.g. from Companies House for a small fee. They allow you to get a picture of what level of creditors the company has at the year-end and how much cash they have available. For very large companies, there is also the need to disclose the average time it takes to pay their suppliers. The problem is though, that for very small businesses, the amount of information available will be restricted so you can't glean so much from their published accounts. There is also always a delay before a company needs to file their accounts publically; generally up to 9 months in arrears, meaning the information in them could already be out of date by the time you read it. However, when added to other information you have available about a company, it still helps to form another part of the jigsaw.
Advance payment:
If you have a very new customer it may be that you'd prefer to use pro-forma invoices in the first instance such that they pay you in advance of receiving the products/services. This allows you to get a sense of their approach to paying debtors, and also develops trust between you. Alternatively, you may want to arrange for stage-payments if you're working on a longer-term project with the client. This will again limit your potential exposure if the customer ends up not paying promptly.
When an invoice is due:
Follow up on invoices which are overdue: Having a clear process for reminding customers that you are awaiting payment is sometimes all it takes to get your invoice to the top of the pile. Call all customers as soon as an invoice is overdue, then have a set procedure for following up with emails, letters and/or phone calls every week or so thereafter.
Know your rights: You're entitled to set your own payment terms for each customer including requiring upfront payment, applying discounts where customers settle early or applying interest for late payments. What you may not know is that, unless otherwise stated, there is a default that a customer must legally pay you within 30 days of receipt of your invoice or of the goods/service.
Taking card payments: Although taking debit and credit card payments is viewed as convenient, it does come with its own set of issues, most notably the potential for chargebacks i.e. transaction reversals where customers reclaim the value of the payment from you. These typically occur when the customer claims the item purchased wasn't received, wasn't as described or when a card was used fraudulently. Remember too that you're not safe from the threat of chargebacks until 120 days after the transaction has taken place.
To reduce the risk of chargebacks being applied to your account, it is always better if the customer/client can be present in person to enter their PIN in the handheld device; where a PIN is successfully used, this eliminates the possibility that a chargeback can be applied for fraudulent use. Second best is when you can get a signature authorisation, which also provides greater evidence in cases where fraud is claimed. Where the customer isn't present and online or telephone payments are taken by card, the risk of chargebacks are much higher.
A Statutory Demand: You can use a statutory demand without the need for a lawyer, when all other avenues are exhausted, to formally demand that you are paid what you're owed by a company or an individual. There is a time limit of 6 years after which you can no longer make a Statutory Demand, although there may be other legal avenues open to you. The creditor has 21 days after receiving a Statutory Demand to either pay the amount owed or reach an agreement to pay it.
Where no response is received to the demand, you can apply to bankrupt the individual or close the company depending on who the creditor is. Full details of further options available are available here.
