How to Get Customers to Pay Invoices on Time

Getting paid on time is crucial for maintaining steady cash flow and keeping your business running smoothly. However, many business owners, and particularly tradespeople face challenges with delayed payments, which can lead to financial strain and operational disruptions. We explore practical strategies to help you get your customers to pay invoices on time.

Set Clear Payment Terms

Establishing clear payment terms from the outset is a great way to ensure your customers understand how much they need to pay and when it needs to be paid by. Here’s how you can do this effectively:

Specify payment deadlines 

Clearly state the due date on the invoice. For example, “Payment due within 14 days of invoice date”. For progress payments associated with ongoing work, if you don’t receive payment by the due date, ensure you have a clause in your contract that states you reserve the right to cease working on their project until overdue payments are made. 

Early payment incentives 

Offering discounts for early payments is a tactic sometimes used to encourage customers to pay early. For example, “2% discount if paid within 7 days”. However, it’s essential to weigh the benefits of early receipt of cash (at a discounted price) against the potential impact on your profit margin. How would you manage cash flow if your customers didn’t pay early? Would you need to use business finance? The amount of discount you offer could be less than the interest you would pay on having to use business finance to cover your cash flow needs.

Late payment penalties 

Include a clause about late fees to deter your customers from dragging their feet with payment. For instance, “A 2% late fee will be applied to overdue invoices”.

When determining the late fee, think about the costs associated with managing outstanding invoices. There’s admin involved in chasing the invoice, as well as the potential need for business finance, such as a credit card, to smooth out any cash flow issues that occur due to the outstanding invoice. 

Use Professional Invoices 

A professional looking invoice reflects your business's credibility but also helps to clearly communicate the expectations.

The following should be included on an invoice:

• Detailed descriptions: Clearly list the services provided and the corresponding costs so the customer can easily understand what the amounts are for. 
• Contact information: Provide your business’s contact details for any queries.
• Payment methods: Mention all accepted payment methods to give clients flexibility. Enabling multiple methods of payment — for example, credit card, direct debit, or online payments — can help to remove roadblocks for customers when they’re making their payment.
• Details for compliance purposes: There are certain elements that need to be included on an invoice to ensure it complies with the ATO’s requirements. You must include:
  • The words “tax invoice” at the top.
  • Your business name and contact details.
  • Your Australian business number (ABN).
  • The date of the invoice.
  • A brief description of each line item, including the quantity and unit price. 
  • The GST amount. If the invoice does not include GST, you can simply write “This invoice does not include GST”. 
  • The total net of GST.
  • The total including GST. 

If you use online accounting software, like Xero, you can rest assured that your invoices are going out with all the information required. Accounting software also helps reduce errors, sending out your invoices in a timely manner, which can help improve payment times.

Communicate Clearly

Clear and frequent communication can prevent misunderstandings and ensure that your customers are aware of payment expectations. Here’s how:

• Discuss terms upfront: Go over payment terms before starting any work and be sure to include them in the contract with your customer. 
• Send reminders: Use email or SMS reminders before the due date and follow up immediately after the due date passes. Sometimes people genuinely forget, and a reminder can ensure you’re paid on time. 
• Check-in regularly: Maintain regular contact with customers throughout the project to address any concerns promptly. This helps to reduce the risks of invoice disputes. 

What to do if your customers do not pay on time

When payments are delayed, it’s essential to address the issue immediately so it doesn’t become a bad debt. Sending a friendly reminder as soon as the payment is overdue, and then again at certain milestones, for example, at 5, 7 or 10 days overdue. If your customer is not responsive or continues to not pay, it might be wise to negotiate a payment plan with them. While this can be inconvenient for you, sometimes it helps you get paid for the job without having to use harsher methods. It can also ensure your relationship with the customer remains strong. 

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If you’ve followed up with your customer multiple times and they are still not paying, it might be time to consider using a collection agency. They are experts in collecting overdue debt and often can get better results than you trying to do it yourself. If you get to this point, you can write to your customer stating that you’re giving them final notice, and if they do not pay within a specified timeframe (for example, one day), their account will be handed over to a collections agency. Often, this will be enough to prompt most customers to pay. 

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After sending a final notice and still not receiving payment, it could be time to assess your legal options. A commercial lawyer can help weigh up your options in regard to legal action. 

Managing Cash Flow

Delayed payments can lead to cash flow concerns for your business. It’s a good idea to have a backup plan for covering extended periods while waiting for payments. 

Keeping cash reserves available to fall back on is an option, however, you need to decide if this is the most efficient use of funds. For example, you might prefer to invest your cash reserves elsewhere in the business to earn a return, rather than have it sitting there to cover cash flow implications associated with late paying customers. 

Many businesses utilise different forms of business finance to help manage cash flow, but you need to decide if it’s the right choice for you. Things like small business loans, invoice finance or credit cards come with fees and interest rates that need to be considered. 

Getting customers to pay invoices on time is vital for the financial health of your business. By setting clear terms, using professional invoices, offering multiple payment options, and maintaining good client relationships, you can reduce the likelihood of payment delays. Implement these strategies, and you’ll be well on your way to ensuring a steady and reliable cash flow for your business.

If you’d like help deciding on the best way to manage bookkeeping or cash flow concerns, we’d love to help! Please reach out to us today. 

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