Late-paying customers and your cash flow

A business can be profitable on paper and still run out of cash. The most common reason is simple: customers take longer to pay than you can afford to wait. You've bought the materials, paid the wages and done the work, but the money is sitting in someone else's bank account.

Late-paying customers hit small businesses hardest. MBIE reports that 97.2% of New Zealand enterprises are small businesses with fewer than 20 employees, and most don't have the reserves to carry large debtors for long. This guide shows you how to measure the damage, prevent it, chase overdue invoices without burning good clients and fund the gap when the money is slow. If you own property, we'll also show where a fundU working capital loan fits.

How do late-paying customers damage your cash flow?

Late payments create a gap between when you pay out and when you get paid. Every day an invoice sits unpaid, you're effectively lending your customer money, interest-free and unsecured.

The damage spreads quickly:

• Your own bills don't wait. Wages, rent, supplier accounts and loan repayments are due on fixed dates regardless of what customers do.
• Tax still falls due. GST, PAYE and provisional tax don't move because a customer is slow. Inland Revenue charges a 1% late payment penalty the day after the due date, a further 4% on day 7 on any remaining tax, and interest on overdue amounts.
• Growth stalls. Cash tied up in debtors can't be used for stock, equipment or new work.
• You become the late payer. Many businesses pay suppliers late because their own customers paid late. That chain is how good businesses end up on stop credit.

How do you measure the problem? Debtor days explained

Debtor days is the average number of days it takes your customers to pay. It's the single most useful number for understanding a late-payment problem.

Debtor days = (trade debtors ÷ annual credit sales) × 365

For example, if customers owe you $150,000 and your annual sales on credit are $900,000, your debtor days are about 61. If your terms are 20th of the month following, customers should be paying in roughly 35 to 50 days. A figure of 61 tells you they're running late, and by how much.

Next, run an aged debtors report from your accounting software. It groups what you're owed by how overdue it is:

Age of debt	What it usually means	Action
Current (not yet due)	Normal trading	Invoice promptly, send a pre-due reminder
1–30 days overdue	Oversight or a slow payment run	Polite reminder and a phone call
31–60 days overdue	Cash problem or dispute on the customer's side	Direct call to the decision-maker, firm date
61–90 days overdue	Serious risk	Stop further supply on credit, formal demand
90+ days overdue	High risk of loss	Collections, statutory demand or court claim

If one or two customers make up most of the overdue balance, you have a concentration risk as well as a cash flow problem. Losing either could hurt badly.

How do you get paid faster in the first place?

Prevention beats chasing. The best time to fix late payment is before you do the work, when you still have leverage.

• Use signed terms of trade. Set out payment terms, late payment charges, ownership of goods until paid and who pays collection costs. Get them signed before first supply.
• Check new customers. Look up company customers on the Companies Office register and the NZBN register to confirm they exist, who the directors are and how long they've traded.
• Take deposits. For larger jobs or custom orders, ask for a deposit before you start. It covers materials and filters out customers who can't pay.
• Bill in stages. Break longer jobs into progress payments tied to milestones rather than one invoice at the end.
• Invoice the same day. Every day an invoice isn't sent adds a day to your debtor days.
• Make paying easy. Put your bank account number, the invoice number and the due date at the top. Offer online payment where it suits your customers.
• Shorten terms for new or slow payers. Keep generous terms for customers who've earned them.

If you register a security interest on the PPSR over goods you supply on credit, and your terms of trade allow it, you may have a stronger position if a customer fails. Ask your lawyer to check your terms cover this.

What's a good chasing timetable for overdue invoices?

A consistent, polite and firm timetable gets most invoices paid without damaging the relationship. The key is doing it every time, on schedule, rather than chasing only when you're desperate.

1. 3 days before the due date: friendly reminder email with the invoice attached.
2. Day 1 overdue: short email noting the invoice is now due and asking for a payment date.
3. Day 7: phone call to the person who approves payments. Ask directly when it will be paid and confirm by email.
4. Day 14: second call and a written reminder that late payment charges apply under your terms.
5. Day 30: stop further credit until the account is up to date. Tell the customer, calmly, that you're doing so.
6. Day 45: formal letter of demand setting a final date.
7. Day 60 onwards: decide between a collection agency, a statutory demand for a company customer, or a court or Disputes Tribunal claim.

Keep notes of every call: who you spoke to, what they said and what date they promised. If you escalate later, that record matters.

When should you use a statutory demand?

A statutory demand is a strong option for an undisputed debt owed by a company. Under section 289 of the Companies Act 1993, the company has 15 working days to pay, settle the debt to your reasonable satisfaction or apply to court to have it set aside. If it does none of those, you can apply to liquidate it.

It works because it's serious. Most company customers who can pay, will. But it's not the right tool for every situation:

• Use it for clear, overdue debts where the work was done and there's no genuine dispute.
• Don't use it for disagreements about quality, variations or scope. The customer can apply to set it aside, and you may face costs.
• Remember the relationship. Once you've issued a statutory demand, you're unlikely to keep that customer.

Your lawyer can prepare and serve it correctly. If you work in construction, the Construction Contracts Act 2002 gives you a separate payment claim process. Our guide on construction retentions and payment claims explains how it works.

What if your customer is in financial trouble?

Watch for the warning signs early: payments that used to arrive on time now slipping, part payments without explanation, a new contact handling accounts, or promises that keep moving. When you see them, act before other creditors do.

• Stop extending more credit. Move the customer to cash on delivery or payment before dispatch until the account is clear.
• Agree a written plan for the arrears. A dated schedule is better than a vague promise.
• Check the Companies Office register. Look for changes of directors, a new registered office or any insolvency notices.
• Keep supplying only if the margin justifies the risk. A big order from a struggling customer can turn into a bigger bad debt.

If a company customer goes into liquidation, unsecured creditors are often paid little or nothing. Getting paid early, even in part, is usually worth more than waiting for the full amount.

What if you're now behind on your own bills?

Deal with it early and honestly. Tell your key creditors that a customer has paid late, what you're doing to collect and when you expect to pay. A creditor who understands the cause is usually more flexible. Our guide on how to talk to creditors and buy time has a simple script.

Pay particular attention to GST and PAYE. If you account for GST on an invoice basis, you may owe GST on sales your customer hasn't paid for yet. Letting tax slide to cover the gap leads to penalties and interest that make the hole deeper. Our guide to fixing GST and PAYE arrears covers how to get back on track.

How can you fund the gap while customers pay?

The usual options are an overdraft, invoice finance, negotiating longer terms with your own suppliers, or a loan secured against property. Each suits a different situation.

Option	Best for	Watch out for
Bank overdraft	Short, predictable gaps in an established business	Limits can be reduced; harder to get after a decline
Invoice finance	Businesses with many creditworthy business customers	Relies on your debtors; customers may be notified
Longer supplier terms	Businesses with good supplier relationships	Only shifts the problem along the chain
Property-secured working capital loan	Larger or uncertain gaps, or where banks have said no	Needs property security and a clear exit

A property-secured loan doesn't depend on your customers' credit or on invoices being approved. It gives you a lump sum to cover wages, suppliers and tax while you collect, and it can be repaid as the big invoices come in. fundU's working capital finance is designed for exactly that.

Example scenario

An engineering and fabrication business in Hawke's Bay had grown quickly by winning work from two large customers. Both paid on extended terms and were routinely running 30 days late. The business was owed about $260,000, much of it more than 60 days overdue, and GST and supplier accounts were starting to slip.

The owner put a proper chasing timetable in place and moved both customers to progress billing for new jobs. To cover the gap, fundU provided a $150,000 second mortgage over the owner's investment property, which was worth about $720,000 with a bank mortgage of around $330,000. The loan cleared the GST, brought the steel supplier up to date and funded two months of wages. It was set up interest-only, with the exit being repayment as the overdue invoices were paid. This is an illustrative example, not a real customer.

Key takeaways

• Measure debtor days and run an aged debtors report so you know exactly how late customers are.
• Signed terms of trade, deposits, progress billing and same-day invoicing prevent most late payments.
• Follow a consistent chasing timetable, starting before the due date.
• A statutory demand gives a company customer 15 working days to pay, but use it only for clear, undisputed debts.
• Don't let GST and PAYE slide to cover slow payers.
• A property-secured working capital loan can fund the gap without depending on your customers' credit.

Get your cash flow moving again

If late-paying customers have left a hole in your cash flow, fundU can help you bridge it. We're a direct private lender offering loans of $20,000 to $1m secured on New Zealand property, with decisions made by our own team. Learn more about short-term business loans and fast business loans, then see if you qualify. It takes a couple of minutes, won't affect your credit score, and a lending specialist will call you back. Or call us on 09 875 4577.