Many companies generate more business during the fourth quarter than they do at any other time of the year. However, these same businesses also experience payment problems – not only during the holiday season but all year long. According to SCORE, if small business owners were paid for all of their outstanding invoices, they could hire 2.1 million employees and pay themselves an incremental $31K each year.
Without the money you are owed coming in, you may not have the funds you need to grow your business by investing in more inventory, hiring additional employees, or launching a bigger marketing campaign. While there is no way to ensure that every customer will pay their bills on time, there are steps you can take to help minimize the damage late payments can cause – and still maintain good customer relationships.
Clarify Your Terms
Before working with any new client or customer, be very clear with them about your payment terms. Specifically identify when they need to pay, at what point they will be charged a late fee, and the percentage or dollar amount of that fee. Many business owners include these details on each invoice or post their policies on the company website.
If you decide to negotiate special terms with specific customers, it is critical that you put them in writing. This will help avoid disagreements down the road as well as lay the groundwork for a positive and trustworthy customer relationship.
Request Payment Up Front
Many business owners ask for a percentage of payment in advance before they begin work. Others schedule payment in installments during the course of a project, often when specific stages are completed. You can decide not to engage with clients or customers who refuse to pay in advance, or stop work or withhold product delivery if the client doesn’t pay an interim invoice on time. You will have more leverage for getting paid if the client is still waiting on delivery of a project or merchandise.
If your background research has raised red flags about a prospective client’s creditworthiness, ask for partial or full payment in advance. If the client agrees, it may be a sign that they are eager to do business with you and committed to making future payments on time.
Some customers pay late because they receive invoices long after they have used the products or services. One way to prompt them to pay faster is to issue invoices immediately after the customer has received your goods or services.
Review your invoice template to make sure it is easy to read and understand. The customer should be able to quickly see the amount due, the due date, and what the bill is for. Make sure that your accounts payable staff is sending bills to the correct postal or email address as well as to the department or person responsible for making payments.
Keep Track of Payments
Staying on top of your business finances will allow you to pinpoint potential problems early. Keep track of what has and has not been paid. The right accounting software will make it easy to generate an income statement, balance sheet, and cash flow statement so you can track which customers continually pay late.
If a payment is late, don’t wait to follow up. Reaching out to customers as soon as their bill becomes past due is the best way to ensure that you will receive a payment by the end of the year. The sooner you take action after a customer’s invoice becomes past due, the greater the chances you will be able to collect. Sending automated payment reminders is another effective and easy-to-implement strategy.
Don’t hesitate to charge late fees for unpaid invoices. Set up a timeframe that you use with every client, such as 15 or 30 days after an invoice goes unpaid. Send a message letting the customer know you are going to add a late fee if the invoice isn’t paid within a specified period. If they fail to pay after the reminder, keep tacking on fees as necessary.
Incentivize customers by making it attractive and easy for them to pay you. Consider offering early payment discounts, like taking 10% off the invoice amount if a client pays within 30 days.
You may also want to streamline your payment process so customers or clients can pay you faster. If you don’t already, consider accepting major credit cards or use available technology to offer multiple payment options such as through PayPal or Apple Pay. Accepting more than one form of payment gives customers flexibility and convenience, simplifying the process of paying their invoices.
Hire Professional Help
If repeated attempts to contact the customer and collect your payment have failed, it’s time to consider seeking outside help to recoup your losses. A debt collection agency specializes in recovering payments that are typically more than 90 days past due. They rely on various forms of communication to reach customers and persuade them to pay, including phone calls, letters, and emails. A good collection agency is usually successful at recovering debts because they understand which strategies are most effective. In some cases, they turn to the legal system to collect if all other efforts have failed.
Even after getting paid, you need to seriously consider whether it is wise to work with the customer again – or invest your energy in finding clients who are willing to pay on time.
Late-paying customers can cost you time and money, but this doesn’t mean you need to worry about having enough cash on hand to manage day-to-day operations. Summit Financial Resources offers working capital loans that use your accounts receivable and other assets as collateral. We can mix and match from a variety of product options to suit your needs, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
With solid strategies in place to avoid late payments and financing you can rely on, you can minimize risk, avoid difficult situations, and maintain the cash flow you and your business depend on to thrive.
Working Capital Financing is a few clicks away.
Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.