Late payment is the scourge of the startup world, and one of the prime reasons why so many fail to survive beyond five years.
Research carried out by the U.K.’s Federation of Small Businesses found the average delay in payments to small businesses and the self-employed is around six weeks, and that the worst offenders are large organisations, with 61% of late payments coming from large private firms. Having experienced the dilemmas created by late payments, some entrepreneurs have come up with their own strategies for tackling the problem.
Like many new business owners, during her first year in business Sandra Lewis, founder of virtual assistant provider Worldwide101, would invoice clients at the end of each month for services they had consumed.
“As you can imagine, we had the problem that so many businesses have: some clients would pay late, leaving us unsure, month after month, if we’d be able to make payroll,” she said. “In year two, I began to understand that most of our customers not only loved us, but wanted us to thrive. That gave me the confidence to start asking new clients to pay us in advance of services rendered, with a satisfaction guarantee. I braced myself for the angry backlash, but it never came: not a single client challenged the request.”
Sales coach Petra Foster works with businesses all over the world, including in the U.S., U.K., and Australia, and also operates an upfront payment system.
She says: “I send out the contracts first so that they know what they are signing up for and when payments are due. During the sales process, I take down their debit or credit card details myself and take the payments upfront. I don’t offer discounts, but I do state how much value they are getting, which motivates them to buy and to pay in full. If the payment does not go through, they have to pay a percentage. All of this has totally mitigated against late payments. When people understand the real value of what they are getting, they are less likely to default on payments as they see it as essential for their business.”
One of the biggest challenges for business owners in the luxury resale market lies is providing seamless liquidity in global sales channels. People make offers to purchase various items, but then don’t pay once a sales price has been agreed and a contract formed. Luxury goods business Cudoni has solved this problem by incentivising quick and complete payments, offering free, next-day delivery for payments made within 24 hours.
Founder James Harford-Tyrer says: “Although it eats slightly into our margins, it’s allowed us to reduce non-paying buyers by over 33%, which has helped support our sevenfold growth in sales over the past few months. Prior to founding Cudoni, I was COO of a UK technology SME. As with most service providers, the potential for non-paying clients posed a problem. To solve this, we created three payment tiers; full payment before the handover at our normal rate, payment upfront with a discount, or payment in monthly instalments with a discount. Naturally, most clients opted to take advantage of our preferential rates, and in turn, this helped us to reduce debtors by 50%.”
Late payment from overseas clients can be an even bigger challenge for small businesses, due to cultural differences in the way that invoices are settled. Companies in Spain, for example, tend to pay invoices after 75 days, while Italian firms take on average of 67 days to pay, according to research from Bibby Financial Services.
When receiving funds from international clients the advice from Laurent Oberholzer, head of business development and co-founder at Monito is to compare the different options to collect payments locally.
He says: “By enabling your customers to pay you via a domestic wire transfer instead of an international payment, you’ll reduce frictions and accelerate your receipt of the funds. TransferWise’s Borderless Account and CurrencyFair offer excellent solutions to getting paid in your client’s currency with ease, and you’ll pay lower fees while benefiting from significantly better exchange rates than with your bank.”
However, as global e-commerce entrepreneur Talha Babarpoints out, nothing beats the threat to business posed by late payments than having cash to fall back on.
“Keeping a small percentage of income deducted from our gross profit is essentially mandatory,” he says. “For example, if a customer payment is late and our own payroll date is approaching, we can pay our employees from this banked money, and replace it once we have received the payment.”
Another strategy he has used is to invest in real estate, the stock market and other businesses. He added: “These financial securities can be volatile, but they can also be a great way to keep money in the form of tangible assets which can be sold or cashed out. In business, you have to be prepared for the worst of scenarios.”