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One of the biggest challenges for small businesses is getting paid on time. In fact, almost half of Australian small businesses have more than $20,000 owed to them by late payers.
Late payments are on Australian Small Business and Family Enterprise Ombudsman Kate Carnell’s radar. She argues that big businesses and multinationals are delaying payments, using the tactic as a cheap form of finance.
“Large, billion-dollar multinational companies are extending their payment times to as long as four months — no small business can last that long,” Carnell said last year.
Imposing charges on these businesses can expedite the payment processes, but doing so takes deliberation, research and a strong will.
“You have to be extremely clear up front,” advises Sue Barrett, CEO of Barrett Consulting. Barrett recommends three key changes businesses can make to ensure their late payment terms actually result in getting paid.
While developing a legal document is not something all businesses think about – or think they can afford – Barrett advises SMEs to sit down with a lawyer and develop a legal document that can serve as a contract template – including late payment penalties.
“Have clearly defined terms and conditions, and articulate that customers need to sign them before you start working with them,” says Barrett.
“It needs to be industry-specific. I’d recommend investing in a proper contract and don’t start any work until that prospect or client signs it.”
Far from seeming pushy, Barrett says this will give SMEs an air of confidence.
While some SMEs might be cautious about investing money in a lawyer, creating a template means those costs will be recouped fairly quickly.
Asking for late payment fees is only helped if businesses have a robust payment strategy in general, Barrett says.
She recommends asking for as much money up-front as possible – between 25-50% in the case of her own business.
“Based on the size of the contract,” Barrett says.
“You just need to be clear in your terms and conditions. It’s much easier to get goods back, but I can’t get my time back and so we have an upfront payment fee.”
And if they still refuse to pay? Barrett says late payment penalties don’t always have to be in the form of money – you can simply stop working.
“Just don’t deliver the rest,” she says.
“We had a payment due back in July that still wasn’t paid just before Christmas. There were a number of things we withheld from them.”
It can be frightening to be forthright and demanding about money. But Barrett says you should get over any shyness you have – especially when it comes to the security and future of your business.
“Just remember that what you do is worth something,” she says.
“There are a whole lot of time-based businesses and consulting businesses that are getting ripped off.”
Nina Hendy, founder of the Freelance Collective, says many freelancers are now instituting late payments terms – and these are often very effective.
“A growing number of businesses are employing freelance creatives to undertake project work such as website design, copywriting, PR or marketing, and yet without a doubt, getting paid on time is one of the most difficult elements of running a freelance business,” she says.
“But growing numbers of freelancers are taking back control by penalising late payers by adding a clause to their contracts that explains to their clients that a penalty fee of 10-20% will be added to their invoices if they aren’t paid within the 30 days.”
“And reports are that it’s working well to keep clients on the straight and narrow.”
At Bankwest, we know that Business Banking is about more than just financial solutions. Explore our tools, information and products to help you start, manage and grow your business. bankwest.com.au/business/guides-and-tools
