There are many valid reasons why customers fail to meet their financial obligations. Unfortunately, non-payment of debts can put the health of your business in jeopardy.
You need working capital to cover operational expenses and purchase inventory. When customers fail to pay, this cash is tied up in your accounts receivable.
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It’s simply smart business to make debt collection an integral part of your cash management strategy. Dealing with late-paying customers is not always pleasant, but we’ve put together a few suggestions to help you successfully navigate the process.
Focus on prevention.
There are customers you can trust to pay on time and those you cannot. Your job is to know as much as possible about a prospective customer’s track record before you extend them credit.
Ask customers to apply for credit and make sure your application includes information such as a tax ID number and trade references to help you determine how they have operated with other creditors. Pull their business credit report through a reliable provider like Dun & Bradstreet to gauge their financial performance. Consider using other tools such as social media channels to help decide whether or not to extend payment terms to a new customer.
Be clear about your terms.
Once you’ve done your due diligence and determined that a customer seems like a good credit risk, be very clear with them about your payment terms. Specifically identify when they need to pay and the consequences of late payment. Many business owners include these details on each invoice or post their policies on the company website to avoid disagreements down the road.
Give customers the incentive to pay you.
Consider offering customers incentives such as discounts for paying their invoices early. Use available technology like online and mobile payments to offer them multiple payment options, along with reminders that include payment details. Accepting more than one form of payment gives a customer flexibility and convenience, making the process of paying an invoice easier.
Have a collections strategy.
Creating a collections process is a key decision that small business owners need to make. 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. You may have requested payment from the customer numerous times without results, but a call from the top executive is likely to be taken more seriously.
You can also use your accounting or invoicing software solution to send invoice payment reminders and help track delinquent accounts. Programs geared towards small businesses such as Xero and Wave allow you to create customized reminders that can be sent until the payment is made. Delivering regular reminders can help prevent a difficult situation from escalating.
One important consideration is how hard 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 in mind that the collections process can be a learning opportunity. Initiating a friendly, honest dialog may help you determine why a customer cannot pay on time and open the door to a mutually agreeable solution to prevent a late payment from going into collections. When making calls, ask if there is a problem with the product; if there is, request a credit from your vendor. You can also find out how well the product is selling and uncover leads for new business.
Outsource to a third party.
When you’ve exhausted all efforts and a customer simply refuses to pay their debts, it’s time to consider seeking outside help to recoup your losses. For example, although Summit Financial Resources is not a collection agency and does not provide debt collection services, when dealing with financed invoices, we do make calls on behalf of our clients. This service relieves you of the burden of pursuing payment and allows you to focus on running your business.
Outsourcing to a third party firm or a commercial collections agency is effective in recovering debts because they understand which strategies deliver results. However, there is a reason the industry has gotten a bad rap. Some agencies rely on unscrupulous, even illegal tactics. This is something to avoid at all costs because it reflects poorly on your business.
Do your research to understand what separates the good collection agencies from the bad. These tips will help you find a firm that is professional, ethical, and has an established track record in your industry.
Avoid a cash flow crunch.
Successful businesses of all sizes are faced with the challenge of late payments, 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 for small to medium-sized businesses 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. Because working capital loans can be used for any business expense, you’ll have the cash you need to navigate any shortfalls.
Building solid customer relationships is vital to success, but cash flow is what keeps your business humming. Late-paying customers can cost you in the long run, but these strategies will help you minimize risk, avoid difficult situations, 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.