Credit management is a task that some small business owners shy away from. It can be difficult to wear the salesperson’s hat one day and the credit manager’s hat the next. Chasing payment of late invoices, though, is an essential task. If you don’t keep on top of your debtors, some of them will take advantage of you.
Late paying customers can have a serious impact on the cash flow of a business. Your profits may look great, but your bank account won’t.
I’ll go a step farther: if you’re a small company, this behavior is downright disrespectful. You need this money to put food on your team’s table. From past experience, I can tell you that delinquent businesses are a mix of bullies squeezing you and people who are truly in financial trouble. If these are the bulk of your clients, consider finding new ones.
You can never guarantee when customers will pay you. But you can encourage them to pay you in a timely fashion without being aggressive. Here are ten tips on how to encourage your customers to pay you faster.
1. Have Unambiguous Payment Terms
Make it clear on the face all your invoices what your payment terms are. Phrases such as “prompt payment would be appreciated” are not very effective. If your terms are thirty days from the date of the invoice, then that should be clearly visible on the front of the invoice. Don’t be shy about displaying your terms. Use a big, bold font so that there is no doubt in your customer’s minds when your invoices will need paying.
2. Issue Invoices Promptly
Issue invoices as soon as you can. Modern accounting software packages make issuing invoices easy. Most packages also allow you to email your invoices to your customers. Issue your invoices as soon as you have completed the work. Don’t leave it to the weekend to catch up on your invoicing. If you do, you will already have cost yourself a week of credit on some of those invoices.
3. Offer Early Payment Incentives
Early payment discounts will make some of your customers pay you earlier. You could, for example, offer a 5% discount for payment within 15 days. You may want to consider a small discount for paying invoices on time as well. Payment discounts will make chasing payment invoices easier. Instead of chasing for payment, you will be calling customers to help them save some money.
If you’re working with a client in severe distress, don’t be afraid to ask for payment in advance or a service retainer. Take a lesson from the lawyers – they insist that difficult clients pay them in advance and you should emulate their wisdom here.
Along the same lines, I always value the business of prepaid cash customers very highly.
4. Charge Late Payment Interest
Charging interest on late payments might seem like an aggressive tactic, but it does work. It is fair, too, because you must cover the cost of funding late payments. You must, though, make the terms of the late fees clear on your invoices. Using the carrot and stick approach is usually the best approach. Offer both early payment discounts and charge late payment interest. Then, your customers have double the incentive to pay you on time.
5. Offer Multiple Payment Methods
Make it easy for your customers to pay you by offering several payment methods. If customers can pay by bank transfer, PayPal, credit card, or check, you will find that customers will pay your invoices faster. This is because they can use a payment method that is convenient for them. It can also be because they have funds available in one type of account, but not in another type.
6. Don’t Do Any Further Work Until You Have Been Paid
Don’t keep on working for a customer that has overdue invoices. If a customer is not paying their invoices, it may be a sign they are having financial difficulties. Doing more work for a customer who has overdue invoices will only make a bad situation worse.
Are you managing their website or providing a SAAS software service? Don’t be afraid to suspend their service in the event of severe delinquency… This is a very effective way to force payment if the business is still a going concern.
7. Send Payment Reminders
Send payment reminders a few days before an invoice is due. Then, follow that up with further reminders if the invoice becomes overdue. Keep the wording of the first reminders polite. The customer may have simply forgotten to pay your invoice. If payment is still not forthcoming after two reminders, it will be time to give your customer a call.
8. Track Your Customer’s Payment Patterns
Most business customers will pay their invoices at the same time of the month every month. Knowing when your customers pay their bills can help you get your invoices paid faster. If you know that a customer always pays their bills on the 20th of each month, make sure you get your invoices to that customer before the 20th. If that customer is sometimes late paying, give them a reminder call the 18th. That will help ensure that your invoices get included in the next batch of payments.
9. Build a Rapport with The Person Who Pays the Bills
Find out the name of the individual who processes the payments for your customers. In a large company, that will be the accounts-payable supervisor. If you can build a rapport with that individual, you will find it easier to get your invoices paid on time.
10. Stay on Top of Your Accounts Receivable
Review your accounts receivable on a regular basis. Send out timely reminders and follow up with phone calls as soon as invoices become overdue. If an invoice becomes very overdue, you may have to resort to using a collection agency. If that becomes necessary, don’t hesitate to do it. The longer you delay taking the appropriate action, the more likely it will become that you won’t get paid at all.
Invoicing and chasing late payments are chores that many small business owners don’t relish. It is, however, essential that you keep on top of both invoicing and collections. Adopt a consistent approach and make it easy for customers to pay you. Be clear about what your payment terms are, and don’t be shy about reminding customers when they haven’t paid. If you stay on top of your invoicing and collections, you will find it much easier to get your invoices paid on time.