‘Act like a large company’ and other tips to help SMEs avoid the sting of late payments


Last week, the Australian Small Business and Family Enterprise Ombudsman released the findings of the Inquiry into Payment Times and Practices in Australia. The results were startling but, for many small businesses across Australia, they were not surprising.

The inquiry revealed almost half of small business are owed more than $20,000 from late payments, and 14% owed more than $100,000. With one in two small businesses reporting more than 40% of their invoices were paid late last financial year, it’s no wonder business owners are feeling stressed and defeated.

Our Canary in the Coal Mine survey of almost 600 SMEs found similarly that late payments were negatively affecting small businesses, with almost half reporting that collecting debts had become more difficult in the past year, and more than a quarter saying they were spending longer on debt collection.

Collecting late payments can feel like a daunting and never-ending task, and with large and multinational businesses being the major culprits of delayed payments for SMEs, you have every right to be concerned. However, it is crucial for your businesses success that you take a proactive approach to ensuring consistent cash flow to make sure you don’t get caught short.

To make sure you have the necessary process in place to keep on top of your cash flow and trading terms, follow these few simple steps:

1. Create a new customer form when granting ongoing credit

Always have a new customer or client fill out a new customer application form. It’s critical that before you grant credit you use these details to run a credit check and have made sure they don’t have a bad credit history. Quickly determining their credit risk and collecting necessary information will assist you in the event of the account going into default, and will better protect you from this ever happening in the first place. A simple check is to call the applicant’s accountant.

2. Implement stringent trading terms

Your trading terms should dictate your relationship with your customers. They need to detail your payment terms and include a clause whereby if debts are referred to a collection agency, the client is liable for any fees involved in the recovery. Include these terms in your new customer form so when they sign the form, they are legally agreeing to the terms. This will put you in a stronger position if they default on their payment.

3. Define your payment terms

Stick to your payment timeframes; if an account goes beyond 30 days without payment you should start following up, and if it goes beyond 60 days it should be referred to a collection agency. Past this 60-day mark increases the risk of it become a bad debt. While there is a clear correlation between the age of a debt being referred and the chances of it becoming a bad debt, the Canary in the Coal Mine research shows an alarming 62.8% of businesses are waiting over 90 days before taking action.

4. Be proactive in your recovery

Appoint someone in your business (often it will be your bookkeeper), whose job is to be responsible for all debt collection activity. Empower that person with the best resources in order for them to do the job properly and don’t interfere with decisions made by them. Most of all, understand that following up debts is a time-consuming process and, while technology can be a huge time saver for your collections person, making personal follow-up calls to debtors with outstanding accounts – time consuming as it is – can significantly improve the percentage of invoices kept within acceptable limits.

5. Act like a large company

Negotiate better payment terms with your existing suppliers. If you are a good customer, most will agree to it. This way, you will begin to balance out your creditors against your debtors and free up cash.

The inquiry into payment terms has revealed the stresses that SMEs already face on a daily basis, but it should also act as an important and timely reminder to big businesses and the entire industry, that small businesses, the lifeblood of the Australian economy, are struggling under the pressure of late payments.

While legislative reforms to set maximum payment time for business-to-business transactions from large companies to smaller suppliers is being mooted, don’t wait for this. Set up your own trading terms first to avoid getting caught out. You don’t have to enforce the terms with your good customers but you need them in place so that you can enforce them when need be.

It may sound simple but understanding your cash flow, and ensuring that cash flowing in exceeds cash flowing out, will save you the headache down the track and will ensure there is always sufficient cash in the bank.


About the author

Roger Mendelson is CEO of Prushka Fast Debt Recovery, principal of Mendelson’s National Debt Collection Lawyers, and the author of ‘The Ten Mistakes Businesses Make and How to Avoid Them’ and ‘Business Survival Guide’.