For small businesses, late-paying customers can be the difference between continued growth and financial hardship. If handling late payments has become a problem for your small business, you are not alone. Creditsafe reports the average DBT (days beyond terms) payment period for B2B companies has increased in all 50 states over the past year. 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.
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 terms upfront.
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 their company’s 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.
If you are unsure about a prospective client’s creditworthiness, consider asking 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. If they have an issue with paying upfront, it could be a red flag.
Incentivize customers by making it attractive and easy for them to pay you. Consider offering early payment discounts, like taking 10 percent off the invoice amount if a client pays within 30 days. You can also discourage late payments by charging a late fee. Use available technology like online and mobile payments to offer multiple payment options, along with reminders that include payment details. Accepting more than one form of payment gives customers flexibility and convenience, simplifying the process of paying their invoices.
Stick to your collections strategy.
Putting effective processes in place to manage your accounts receivable and accounts payable is essential to minimizing late payments. Issue invoices as soon as possible, and 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, and you can track which customers continually pay late. Staying on top of your business finances will allow you to pinpoint potential problems early.
If a payment is late, don’t wait to follow up. The sooner you take action after a customer’s invoice becomes past due, the better. The longer you wait without getting paid, the greater the chances you will never collect.
A friendly reminder that a customer’s bill is past due is the first step in collecting your payment. Send an email or make a call to find out why payment has been delayed. Sometimes this is all it takes to resolve the issue. If the customer has a valid reason for paying late and has been loyal in the past, it is usually worthwhile to try to work out a solution that benefits both of you, such as setting up a payment plan.
When a nonpaying client ignores your emails and calls about the invoice, demand payment a little more firmly. Our customers often establish guidelines that state at 30 days they send a written reminder, at 60 days a junior staff person calls the customer, and at 90 to 120 days the owner makes the call. At this point, it’s critical to involve decision makers who can resolve lingering customer issues and generate a positive outcome.
One important consideration is how hard of a line you are willing to take when it comes to enforcing policies such as late-payment penalties, reducing the amount of credit you are willing to extend, or putting the customer on a credit hold until their debt is paid. You will need to determine if your strategy is worth the risk of damaging or terminating certain customer relationships.
Keep all of your communications friendly, but remember that you are running a business and the relationships you have with customers are professional. Make sure you keep detailed records of all correspondence, invoices, contracts, and attempts to obtain payment in case you need to pursue legal action.
Seek outside 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.
Successful small business owners who are faced with the challenge of late payments do not need to be strapped for cash as a result. Summit Financial Resources is here to help you take advantage of opportunities to improve receivables as well as navigate any shortfalls. We offer working capital loans for small to medium-sized businesses that involve using your accounts receivable as collateral. Because we are not regulated like a bank, we can take more risks and make funding decisions faster. This means we can respond to the changing needs of your business without a lot of red tape and expand your cash flow in a matter of days or weeks, not months.
Take advantage of support services.
Summit Financial Resources offers additional support to help you manage your business finances, including services that work in conjunction with products like invoice factoring. While we are not a collections agency and do not provide debt collection services, when dealing with financed invoices, we make calls on behalf of our clients. This relieves you of the burden of pursuing payment and allows you to focus on running your business.
Clients who are involved in our asset-based lending programs also have access to our proprietary online account reporting system. This service allows you to check daily transactions and track information on the total funds received and the invoices the money has been applied to. You can access the credit reports we pull on your customers, monitor their payment trends, and adjust credit terms if necessary. We respect your relationships with your customers, and we take special care to manage payment transitions smoothly and to handle all transactions with discretion.
Late-paying customers can cost you time and money, but these strategies will help you minimize risk and maintain the cash flow that you and your business depend on.
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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.