Does your company have problems getting paid on time? Certain industries are more vulnerable to this than others, but every business owner has experienced it at least once. There are effective strategies for always getting paid on time that really work. If you put these into place in your company, you may find that you have fewer and fewer overdue payment issues as time goes on.
Don’t Let Receivables Age Too Long
The older your receivables are, the less likely they’ll ever be paid. People have a tendency to “forget” old debts. Older A/Rs also have a tendency to fall off the books, either on your end or your client’s end. Then, when you do get around to calling your client about an old receivable, they might even be annoyed with you about having to go back so far to look up whether or not they ever paid you.
To avoid this scenario in the future, run receivables reports once a week, not once a month. Even if nothing’s due right away, you’ll be able to keep a closer eye on receivables that are nearing the 30-day mark. Don’t allow receivables to go past the 35-day mark without following up with an email or phone call. Some clients will wait the full 30 days before submitting payment. The extra five days allows for a check to arrive in the mail or an ACH transfer to come through. Lastly, a phone call or email works better than a statement notice. Statements are easy to ignore; calls and emails are less so.
Maintain Relationships With Clients
Often, a client is contacted only when a payment is overdue. This can result in a relationship that is distant at best and strained at worst. It also doesn’t create a relationship where the client feels any sort of personal responsibility to your company.
Nurture your client relationships, and you’ll find that you have fewer problems with late payments. Clients who have more frequent interactions with your company will feel like they have a personal obligation to uphold, lest they endanger the relationship. You don’t have to call your clients every week to ask about the family; but holiday cards and an occasional phone call confirming that they’re happy with your services will do wonders for the relationship and your cash flow.
Allow Multiple Payment Methods
Sometimes clients don’t pay bills on time because they’re having cash flow problems. That’s understandable, but that doesn’t help your cash flow, either. When you limit your client to one or two payment methods, you’re inadvertently constraining their ability to pay you on time. They may be too embarrassed to admit to your bookkeeper that they don’t have the cash to pay right now.
If this is a frequent situation, consider offering multiple payment methods on your invoices. This gives clients a way out of your debt while allowing them to save face. In the long run, offering multiple payment methods will bolster a healthy and long-lasting relationship with your client. Some payment options to consider include:
- credit cards (include Amex, Diners Club, Discover)
- in-house financing with nominal interest
- installment payments option
- automatic debits on an agreed-upon schedule
Don’t make clients have to ask for special payment options, either. That would defeat the purpose of getting them to pay on time. Print your payment alternatives on the invoices so all your clients are always aware of their options.
Publish Your Overdue Payment Policy
When you omit your overdue payment policy on your invoices, you give your clients leeway to pay your bills late. If there are no consequences, a client may decide to pay you now or whenever they feel like it. It makes no difference to them as long as there are no penalties attached to late payments.
Publish your overdue payment policy on the front of all your invoices, near the total balance due. Make sure there is a reasonable penalty on late payments. For better results, make the interest on overdue payments increase over time. For instance, overdue invoices start accruing interest of 1% at 45 days past due. At 60 days past due, the interest increases to 1.5%, etc.
Run Background Checks on New Credit Clients
Many companies extend credit to new clients in an effort to increase sales and attract new clients. This can be sound business practice, but credit should be extended prudently. Otherwise, you could find yourself in a situation where clients have racked up thousands of dollars or more in debt, and now you have cash flow problems because they aren’t honoring their credit terms.
Before offering to extend credit to a new client, have them fill out a standard application for credit. Get their FEIN and run a credit check on the company and/or its principals. Run a Dunn & Bradstreet report if applicable. This will help to ensure that you extend credit to worthy clients only, who will be more likely to pay on time in order to protect their strong credit history.
Extend Credit Judiciously
Another potential problem when extending credit is to have too lax policies. When your credit policies are too loose, ambiguous or generous, some clients may take undue advantage of your credit program, resulting in severely late or non-payments.
Your credit program should have very clear parameters, with limits in place that protect your interests, not your clients’ interests. If a client has a proven track record of on-time payments, you can decide later on if you want to offer them more generous terms. In the meantime, your standard credit terms should:
- have reasonable lines of credit (using a percentage of past sales is common)
- accrue interest on credit line draws
- include credit background checks
- allow prepayments without penalty (this helps your cash flow)
- outline clear invoice aging policies with reduction of credit line penalties
Chronically overdue invoice payments have serious consequences on the health of your business. Ramifications can include negative cash flow, inability to purchase needed inventory, low employee morale and can even lead to the need for temporary or permanent layoffs. It’s essential to identify issues with getting paid on time as soon as possible so you can take steps to rectify the situation. The tips above will help to ensure the problem doesn’t crop up again.