Tired of chasing payments? In a perfect world, all customers and clients would pay you on time, every time. But in reality, 17% of all payments to UK small and medium-sized enterprises (SMEs) are late.
Because of that, more than 50% of them currently experience or expect to experience a negative impact on company investment, their ability to pay their suppliers and their ability to pay staff an annual bonus.
The fintech industry is looking to enhance customer experience by using technology and legislative help to offer elevated security measures and mobility tools. How can this help with the pain of chasing payments, if at all? What are the other industry trends that could make getting paid on time easier? And what can SMEs expect in the fight against late payments?
Tech advancements in the chasing payments battle
It looks like 2018 is going to be the most exciting year in fintech to date. Banks and traditional payments services providers (PSPs) are teaming up with tech firms to bring more advanced solutions to market that make managing money easier for SMEs. Understanding that chasing payments is a key challenge, some of these advancements specifically target those barriers.
Research by Sage reveals the biggest hurdle for chasing late payments for 34% of SMEs globally is their desire to protect client relationships. Nicola Anderson, VP Marketing at GoCardless, says that makes adopting instant payment technology a no-brainer for SMEs looking to avoid the awkward conversation.
She says: “Anything that speeds up payment for SMEs is a good thing, whether that’s introducing a decent accounting software package, or encouraging customers to pay invoices automatically by direct debit.
“These measures obviously improve cash flow, but they also take away a lot of needless stress and anxiety away from business owners and allow them to spend more of their valuable time on building the business.
“Using the latest technology available and efficient payment practices will mean that accounting is more under control. Not only does it take the pressure off having that awkward conversation, SMEs get paid faster and those funds are free to move around other areas of the business.”
Benefits of using direct debit
Direct debit, an example of technology for speeding up payments, is a type of automated payment in which a customer authorises a merchant to take recurring payments (of fixed or variable amounts) directly from their bank account, whenever they are due. More SMEs are automating their accounting from end to end by integrating a direct debit solution into their accounting software.
Your customer’s invoice is sent straight from the accounting software, your customer authorises the first and future payments only once (which can be done directly from the invoice).
After that, your customer doesn’t have to take any further action. Some customers will prefer to set up their payment method at the point of engagement or contract prior to the invoice. This is an even better scenario because you don’t need to talk about payments after the initial customer onboarding, and your customer’s payment will automatically draft on the agreed date.
Future payments are debited automatically and the direct debit solution notifies the customer three working days before each payment is taken. Funds are automatically updated within the software in real-time and the invoice is automatically reconciled.
Intelligent tech and ‘smart’ payments
Looking toward the future, GoCardless Head of Product Management Duncan Barrigan says he expects this type of technology to evolve with more intelligence.
“Small businesses will be able to tell their banks to share relevant data with app providers, allowing us to make payments that are ‘smarter’ [e.g. could be triggered when money is in your customer’s account] and more secure [authorised through online banking, for example].
“It will also mean that we will be able to make instant bank-to-bank payments to merchants where needed. For small businesses, all of that means better cash flow and less time chasing payments.”
GDPR and PSD2 legislature have been prominent across UK headlines as of late but the effectiveness of the duty to report payments practices and performance has sparked recent news.
The duty to report in summary is an extension of the Prompt Payment Code, which was first introduced in 2008 as a best practice for large companies to maintain good credit standings. By signing the code, companies voluntarily committed to publishing their payment policies online and following certain standards for payment practice.
The duty to report payment practices and performance legislation, effective from April 2017, requires all companies over a specified threshold (turnover, balance sheet total, number of employees) to report on their payment record. This gives SMEs the opportunity to see which companies are committed to paying their suppliers on time and do business with them based on that repute.
Is this enough to make a difference? This article suggests not but also notes Stevens & Bolton Senior Associate Oliver Kidd’s call for patience before judgement.
He said: “Whilst the regulations came into force in April last year, the reporting obligation is linked to each company’s financial year, so not every company within scope was required to take action immediately.
“It’s also not entirely clear that every company with a duty to report is fully aware of that fact, as I wouldn’t say the regulations have been particularly widely publicised.”
Even businesses that are reporting aren’t necessarily doing so accurately, thus far. So far, 350 companies have uploaded information in the designated centralised portal with varying levels of completion and consistency.
“What isn’t clear is whether there is any procedure in place for the data to be reviewed centrally before it is published. There are currently some 30 plus companies on the list appearing to have reported only their company details and nothing at all about payment performance,” Oliver added.
Where the legislation falls short, is it assumes SMEs have the flexibility to turn down large suppliers or good business opportunities because of poor practices. Furthermore, it doesn’t enforce any sanction for non-compliance or for reporting false information, giving companies no accountability in that respect.
Despite a soft approach, Oliver says the fact that this issue has this level of legislative attention is a positive sign for SMEs and progress toward the necessary culture change.
“The regulations have at least put the issue of late payment on the agenda at boardroom level. Failing to report when required or reporting misleading information attracts criminal liability and potentially hefty fines, so the regulations should not be ignored,” he concluded.
What your business can do to get paid on time
While the industry metamorphises, the most immediate solution for your business to deal with late payments is to utilise technology to eliminate the need to ask.
This technology limits the need for additional conversation after the work is done, but you can also set the tone (and speed) for your transaction with your customers as seamlessly as your usual touchpoints with them:
- Set payment terms early. In this article, writer Neil Martin notes: “People always focus on the price, yet can get fazed when they are asked, so what are your payment terms? And when you get asked that question, you need some answers ready.” He recommends using a document that can be both an invoice and receipt.
- Keep in touch. Send regular updates during the job so the client gets accustomed to a communicative relationship with you. It’s beneficial to develop a personal rapport with clients to make communication more natural.
This is the best way to manage your customers’ expectation about the payment part of the transaction and to show that part is just as important to you as getting the job right.
What’s your game plan for chasing late payments? What more can legislation do to help with poor payments habits? How has technology improved your cash flow? Let us know in the comments below.
The Art of Being Paid
Chasing invoice payments doesn’t have to be painful. Use this kit to answer a few questions about your customers so you understand their payment drivers, then read our advice on how to flex your style for each, calling techniques and much more.