Insight from the Asset Based Finance Association reveals that SMEs are owed up to £64.2 billion in unpaid invoices, a figure that has increased by 36 per cent since 2011. In order to free up valuable time and funds to support business growth, the implementation of a robust credit control function is vital.

Before payment is due

Businesses must follow best practice from the offset. They should start by completing the required client credit checks before a contract agreement is signed. While organisations such as DueDil and Experian are invaluable in flagging any financial irregularities, The Gazette publishes up-to-date information regarding bankruptcy and insolvency notifications. If a potential client is implicated in one of these notices, it could mean that they are about to enter administration.

Aside from this, it is also important to be open about your business’ payment terms. Too often the issue of payment is ignored for fear of putting customers off and communication is restricted to a line in the contract’s small print. Open verbal communication regarding payment expectations increases the likelihood that any required contract amendments are made earlier and invoices are paid on time.

Once payment is due

Sending through an electronic copy of an invoice once it is due is not enough. The most common reasons given for late payment are that either, the information on the invoice is deemed incorrect or that the client has not received a copy of the invoice. For this reason, payment requests should be ‘called in’ to ensure receipt and to encourage customers to check the details of the invoice itself.

The accounts representative should ensure that they are in contact with a member of the team who is responsible for approving and processing the invoice and should aim to build an amicable working relationship with this individual. Often, a personal rapport will encourage any disputes to be identified and resolved quickly, and any issues surrounding timely payment will be openly disclosed. For example, a client may reveal that it is having cash flow issues in a particular month, allowing extended or phased payment terms to be agreed. Such insights can assist both parties in managing working capital and reduce the likelihood of conflict.

All disputes should be recorded and settled with the client in writing. This ensures accurate record-taking and such evidence can be used in future negotiations or eventual legal proceedings, if required. In order for a strong working relationship to be maintained with the client, it is advisable that the day-to-day running of the account and finance functions are handled separately.

In the event that a potential disruption in cash flow is detected, businesses should seek a flexible finance solution to help bridge the gap. Business owners should weigh up potential options including bank overdraft facilities, short term loans and invoice finance in order to select the most cost effective option.

Invoice is overdue

In the event that an invoice is overdue, efforts must be made to ascertain the reasons for late payment. Any disputes raised at this stage should be dealt with in-house and if necessary, a third party or dispute resolution specialist can be called upon to aid negotiations. If the client is genuinely unable to pay in full, the business should aim to offer a staged payment plan in order to recoup funds as quickly and painlessly as possible. Legal action should only be pursued as a last resort. Taking a client to court is likely to damage the working relationship beyond repair and can often prove costly and time consuming.

In following due diligence procedures from the start and promoting open lines of communication with clients, SMEs can significantly reduce the risk of late payment. By focusing on the development of an efficient credit control function and staff training, firms can increase their ability to create accurate financial forecasts, protect cash flow, and free up the funds required to invest in business growth.

John Atkinson is managing director at Hitachi Capital Invoice Finance.