When you’re running a small business, you need working capital to cover operational expenses and purchase inventory. If customers fail to pay, this cash is tied up in your accounts receivable. That’s why make debt collection an integral part of your cash management strategy is simply smart business.

We’ve put together a few suggestions to help you avoid some of the hassles of dealing with late-paying customers and successfully navigate the process of collecting what you are owed.

Make your terms clear.

Before you begin working with any new client or customer, be very clear 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.

Small businesses should not 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.

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, be sure 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 in advance.

Small business owners often ask for a percentage of payment up front before they begin work. Others expect payment in installments during the course of a project, often when specific stages are completed. Working this way allows you to choose not to engage with clients or customers who refuse to pay in advance, or to 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.

Give customers the incentive to pay you.

Consider offering your 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 and makes the process of paying an invoice easier.

Develop a collections strategy.

Creating a collections process is a key decision that small business owners need to make. Businesses often send a written reminder after 15 or 30 days, have a staff person call after 60 days, and at 90 to 120 days the owner makes the call. You may have requested payment from the customer numerous times, but a call from the top executive is likely to be taken more seriously.

Sometimes using a variety of contact methods can be effective. For example, you can start by using your accounting or invoicing software program to send invoice payment reminders and help track delinquent accounts. If sending online messages isn’t working, call. If your contact person isn’t responding to your messages, try reaching out to someone else at the company. If that doesn’t work, and the client is local, an in-person visit could produce results.

Remember to view the collections process as 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 a product is selling and uncover leads for new business.

Hire 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.

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.

Avoid cash flow problems.

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.

Cash flow is what keeps your business humming and late-paying customers can cost you in the long run. With solid strategies in place, 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.

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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.