Late payments – How to ensure your customers pay their invoices on time?

Ekmel Cilingir, Chairman at EMBank Supervisory Board

Late payments can have detrimental effects on businesses, with one out of four bankruptcies in the EU being attributed to overdue payments, according to data from the European Commission (EC). These late payments not only impact salaries but also hinder innovation and disrupt cash flows. In fact, European businesses incur a staggering cost of 275 billion euros annually in recovering late payments.

The EC reveals that every second, 500 invoices are sent within the EU. However, only 200 of these invoices are paid on time. Small businesses are particularly vulnerable to this issue. The European Commission estimates that EU companies could save 158 million euros per day if payment delays were reduced. Furthermore, the elimination of overdue payments could potentially create 900,000 new jobs in the public sector. It is worth noting that 20% of all businesses perceive late payments as a hindrance to their transition towards more sustainable practices.

So, what can small and medium-sized business managers do to enhance their customers’ payment habits and avoid cash flow disruptions and bankruptcy?

To avoid uncomfortable conversations about late payments, it is crucial to proactively prevent them. Firstly, clearly define the payment terms in your agreements and invoices with each new client. This includes specifying a payment due date, late interest fees, and any available discounts for early payments. Additionally, you can establish a specific timeframe within which the payment must be completed from the invoice delivery date. Before entering into any business agreements, it is advisable to ensure that customers fully comprehend and agree to the terms.

While informal methods such as verbal agreements, peer-to-peer terms, and promissory notes still exist in small- and medium-sized businesses, it is essential to prioritize clear and formal payment conditions to foster a culture of timely payments. On the contrary, individuals who fail to make their payments on time may face penalties, such as late interest fees. While some European countries enforce fines through law enforcement, this practice is also effective for businesses in Lithuania. Ultimately, it is always preferable to pay less. This approach can serve as a beneficial incentive for fostering a healthy payment culture with your clients.

When dealing with numerous customers, it is easy to overlook certain payments or simply forget about them for a month or two. The shortfall is often only noticed when there are discrepancies in cash flow. Therefore, it is crucial for every businessperson to cultivate the habit of vigilance and authorization. Develop a systematic approach to monitor overdue payments. Designate a specific day each month to review all payments. If you come across a late payment, send the customer a reminder by the designated date. It is important to remember that personalized communication can sometimes yield better results than automated reminders, as we all occasionally forget things.

However, if you lack the time to keep track of all incoming payments, even monthly, implementing an automated accounting and invoicing system can streamline the payment process. The system can be configured to send invoice payment confirmations, reducing the likelihood of errors, ensuring consistency, and expediting the review of the payment cycle.
Offering clients, a range of payment options is advantageous for any business. When discussing the settlement of future invoices, it is advisable to provide different methods of payment. With the multitude of payment options available today, it is essential for your business to offer diverse choices. Ultimately, the easier it is for customers to make payments, the higher the probability that they will do so promptly.

In the financial sector, it is customary for companies to verify the credit information of potential customers. Smaller businesses seldom engage in this practice. To avoid scaring away potential customers, it is advisable to request a few documents from them, such as details about their existing loans and other financial obligations. Additionally, monthly expense reports can serve as useful tools. Keep in mind that specific companies’ income and debt amounts are publicly available, so you can easily access this information yourself.

Invoicing, receipts, and payments play a crucial role in the relationship between suppliers and customers. It is highly beneficial for business people and managers to maintain strong relationships with their customers. Positive relationships foster transparent discussions about payments and potential challenges on both sides. Moreover, such relationships can encourage customers to prioritize your invoices, especially if they are facing financial difficulties. Paying attention to your customers always yields positive results, including prompt settlement of invoices.

If you are unable to come to an agreement regarding a postponed payment, do not hesitate to pursue legal action. If the steps have proven unsuccessful and it is evident that the client has no intention of compensating for the goods or services rendered, it is advisable to seek the assistance of a legal professional. To ensure a smooth resolution, it is crucial to clearly outline your rights and terms within your agreements, emphasizing that non-compliance will result in legal consequences for the client. Furthermore, it is prudent to be proactive and secure the services of a competent lawyer who aligns with your expectations beforehand, ensuring their availability to address any future business-related issues.

Ekmel Cilingir, Chairman at EMBank Supervisory Board

Ekmel Çilingir | Chairman of the Supervisory Board of European Merchant Bank UAB