Recently a reader wrote me this email “Help my customers are late in paying my invoices and it is screwing up my cash flow. What should I do? I need the money but don’t want to be pushy and negatively affect my customer relationship.”
Have you been in the same seemingly no-win situation? Every entrepreneur and a small business owner has faced this same dilemma of late paying customers and stressed cash flow.
Here are some tactics and actions to take, from successful businesses, to handle this common but delicate situation.
Nobody likes to chase customers for late payments. It is unpleasant and embarrassing. You have to get them on the phone, while they may be dodging you because they know they are running late on payments.
Then when you finally get them on the line you have to have awkward conversations and ask for the money and then deal with their excuses for not paying sooner. In the worst cases repeated emails, reminder letters, and statements or legal action is needed to get your rightful payment for your products or services.
Every successful business has mapped out a slow payer strategy, before the situation arises, on how to deal with late paying clients. You are far more likely to get paid and keep a good business relationship with your customers if you have a plan in place and follow that plan proactively.
Begin your collection policy at the onset of reliable credit application processes and checks. When your new customer asks for payment terms is the best time to set the groundwork for future timely payments. Require a complete credit application with tax ID numbers and 3 or more credit references. Call those references and inquire about average invoice dating, total credit line, and recent payment schedules. Ask if those vendors would consider increasing the customer’s credit line. If they say yes, it is a good sign that the customer will be a good payer. Also, use industry standard credit checks providers such as Dun & Bradstreet to do your due diligence. Many non-payment issues can be avoided by implementing a strict, yet professional, credit application and checking system.
If you customer passes your credit application process and you grant them terms, take time to review your payment terms clearly. This reinforces both the due date of invoices plus the penalties for late payment. Additionally add these financing details on each invoice, in the footer, which helps if you ever have to have that collection phone call, you can refer them to the information on the printed invoice.
The easier you make it for your customers to pay on time the more likely that they will. Offering multiple payment options, such as major credit cards, Paypal and company checks are best. If you bill certain customers regularly set up a recurring monthly payment that is automatically made on a specific day each month. Automating the bill paying process will eliminate getting paid late.
Most small business accounting systems, such as my recommendation Quickbooks Online, allow you to set up automatic payment reminder emails. This easy to use feature is hugely helpful as a gentle reminder to busy business customers to pay their due invoice. You can customize the reminder email to fit your industry and purpose. Also, these bill payment reminders will continue to be sent, every few days until the bill is paid in full without any action on your part.
It is vital that you have an honest discussion with your customer, in person or on the phone – not in text or email. You want to connect with people and discuss the customer’s situation. Often you will find that they are waiting for a payment from their customer too! When you speak as partners, not adversaries mutually beneficial solutions can be found. You could negotiate partial payment or an installment plan to pay the outstanding invoice.
Consider Invoice Financing and Factoring
You can get financing for your small business by factoring, which is a loan on the amount your customers owe you. It is a good choice for fast-growing firms with outstanding invoices up to 90 days. Fundbox will give you up to 100% of the value of your outstanding invoices. If you decide to try factoring, you do not have to “factor” all of your invoices. You can pick and choose which invoices you want to finance and get advance payments.
If after you have spoken with your customer and they still have not paid I suggest you use a collection agency. Do not try and handle the debt collection in-house. There are too many laws and it can be too emotionally draining for you to do it yourself. Today’s collection agency is far advanced from the thugs of yesteryear. Some companies such as TrueAccord has innovated the collection process to both get paid and keep the best possible customer relationships.
To deal with late paying customers have a business line of credit established that you can draw funds as working capital while you wait for customer payments. Cash flow is vital for thriving businesses and late paying customers are very common. Don’t let their tardiness negatively affect your business plans. Get adequate working capital to keep your company running smoothly.