Payment Terms on Invoices – How to Get Paid Quicker and Minimise Bad Debts

Unpaid invoices can have a significant impact on businesses, affecting their financial health and overall operations.

Unfortunately, many businesses underestimate the importance of acting quickly in relation to unpaid invoices. Clearly, the longer an invoice goes unpaid, the bigger the impact on your cashflow.

However, delay can also have knock-on consequences, and it is delay at an early stage that is the most important. By the time cases are passed to an external adviser, it is often too late to avoid those consequences.

Some of these points are valid for both business customers and consumers. However, as many rules are different for consumers, this article focuses on business to business contracts.

Why invoices go unpaid

If an invoice goes unpaid beyond the agreed term, there are three main possibilities.

1. Your customer has not prioritised payment of your invoice. That is quite a common scenario, and in that case a polite request may be enough to unlock payment. For repeat customers, it may be sensible to look at how your payment terms and invoicing interact with their payment processes, to see if you can agree a better system in future. However, you are not going to need to sue these customers to obtain payment.
2. Your customer is seriously considering disputing the invoice. In that case, you may have more issues obtaining payment, though the sooner you find out about the problem, the sooner you can address it. It may also be possible to change your processes and terms to minimise the risk or impact of a dispute. However, although disputes can have a significant effect on your business, they will hopefully be a rare event.
3. Your customer is strategically delaying payment. This is not always easy to spot, as customers will rarely admit that this is the case. If put on the spot – and that may be hard to achieve – most will claim this is an administrative error or will raise some spurious dispute. In this scenario, neither polite requests nor concessions are going to achieve anything. If you are going to be paid, you have to put yourself at the front of the queue for payment. This necessarily involves more aggressive measures, such as threats of proceedings or even insolvency action. You may also need to stop dealing with them, so that you contain the problem.

The issue faced by many businesses is that they do not chase their invoices consistently or quickly enough, which means that they do not actually identify the third category of late paying customer fast enough.

That not only makes it harder to get to the front of the queue, it also means that the customer ends up dealing with them longer. Sometimes, by the time further action is taken, the customer has ended up building up a substantial debt across multiple invoices.

This is why it is important to act quickly.  It is also why it is delay at an early stage that has the most impact. While delay in obtaining payment always harms your cashflow, not identifying the reasons for delay at an early stage makes it impossible to identify the problem customers, which in turn prevents you from following the correct strategy.

The impact of payment terms

The first period of delay is inevitable for most businesses, as they cannot insist on payment up front, or immediately after presenting an invoice. Instead, they need to offer their customer payment terms. By default this is 30 days under the Late Payment of Commercial Debts (Interest) Act, though the 30 day period will not always run from the date of the invoice.

On the other hand, this does not mean that you have to accept the default position. It is possible to agree an earlier date for payment of your invoices, and many businesses are doing just that.

If you do shorten your payment terms, this means that you can start your credit control processes earlier. This also means you can identify the problem customers earlier, and make it more likely you get to the front of the queue for payment.

Of course, you still need to be realistic. Depending on your industry, customers may expect a certain amount of time to pay. You are also likely to be contacting more customers, so your credit control process will need to have the right resources.

Even so, setting a shorter timeframe for payment can significantly speed up how long it takes you to receive payment, as shown in research by bookkeeping software firm Xero.

This is not to say that payment terms are the only important factor. Making it easier for your customers to pay (which means providing clear invoices and clear ways to pay) will also help you to weed out the problem customers. Also, consistently and regularly chasing unpaid invoices is also important. Not all customers will pay after the first chasing letter, even if they are not strategically delaying payment. You need to have a process that helps identify the problem cases. That is likely to involve more than one letter and at least one telephone call.

How do I change my payment terms?

One way to change your payment terms is to change what it says on your invoices. This does not automatically make them legally enforceable, but that is not necessarily the most important issue. It is unlikely you will be issuing proceedings immediately after the payment terms expire, so this is about setting expectations and giving yourself a basis for chasing customers.

Having said this, there is one advantage from getting shorter payment terms agreed, which is that you can claim interest from an earlier date. It can, therefore, be sensible to secure the customer’s agreement to the terms before you provide goods or services, normally as part of your standard sales terms.

Of course, business customers may also seek to impose their terms on transactions, and sometimes those give them longer to make payment. Bear in mind that if they specify a period of longer than 30 days, it may be possible to challenge those terms.

There are many other ways that you can use your sales terms to help your business, for example to tip the balance in your favour if you have a dispute. These are necessarily business-specific, so rather than copying someone else’s terms, it is worth getting some drawn up for you by an expert.

Get expert advice on handling unpaid invoices

Unpaid invoices can present serious challenges for your business. While most businesses handle the initial stages in house, there are always going to be cases where you need to take things further. That is where expert advice can be invaluable.

Longmores has an established reputation for offering expert, commercially minded advice to help businesses with their unpaid invoices. We can help you recover the funds owed to you under even the most challenging circumstances, but we can also offer pragmatic advice on the costs and benefits of taking action. Using our fixed fee debt recovery scheme, we can give you a greater degree of control over your costs exposure.

To discuss how we can help with unpaid invoices, please contact our Partner specialising in Insolvency and Dispute Resolution Nathanael Young. He or one of his team would  will be happy to advise.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.