Nothing can be more frustrating than seeing your company’s financial health compromised by clients who do not pay on time. Unfortunately, dealing with accounts receivable issues is a dismal reality for most small to midsized companies. Nearly half of all invoices issued by U.S. businesses eventually fall overdue, according to Pymnts’ AP Automation Tracker, a resource for payment data and insights.
While this might convince you that collection problems can’t be avoided, there are proactive steps you can take to keep receivables (and your company’s cash flow) in great shape. Here are eight strategies I recommend for all growing companies and professional practices.
Extend Credit Only To Qualified Clients
Whenever you deliver goods and services without requiring immediate payment, you are essentially loaning your clients money. Like any lender, you will want to check their creditworthiness first. Run a credit check with a B2B reporting agency. Ask for business references and follow through to make sure your client has a solid track record of on-time payment.
Think Twice About Offering Credit To Newly Established Businesses
Naturally, you want to help other business founders succeed, but this can expose your company to serious risks. If a client has no credit history, offer them a cash on delivery (COD) account for the first several months so you can monitor how things go. Or you can encourage them to pay with a company credit card, which will help them establish good credit (and meet your credit requirements later).
Spell Out Payment Terms In A Signed Agreement
In a perfect world, we would all do business on a simple handshake, but this leaves your company without a legal leg to stand on later when an account goes delinquent. Always have a written agreement that defines billing and payment terms and states what you will do if customers fail to remit. Get this signed before you deliver goods or services and send copies to your client to document your agreement. If you’re not sure what wording to use, consult an attorney or you can explore contract templates designed for small businesses.
Think Of Invoices As Crucial Client Communications
Make sure every invoice or statement you send is clear, easy to read and scrupulously accurate. Include billing terms in the footer. Provide whatever level of detail your clients need to authorize payments—for example, specific budget codes or charges separated by cost center or work team. These steps can prevent many of the misunderstandings that can delay payment (and even spiral into bigger disputes).
Follow Through Fearlessly When Invoices Go Unpaid
Business founders sometimes worry they will lose clients by enforcing payment terms. But in reality, a client who doesn’t pay on time is one your company can’t afford to keep. This doesn’t mean walking away at the first sign of trouble or losing your temper. It does require you to outline step-by-step procedures that define what happens when invoices move to the past-due column.
Act Fast
Time is never on your side in collecting business debt. In fact, your odds of collecting what clients owe you drop from 70% at the 90-day mark to 50% at 6 months, plummeting to just 23% after a year has passed. This is why you should get in touch immediately when payment problems arise, preferably using more than one channel (USPS, email, phone and even direct messages via social media). Here are tips for adding social channels to your collection strategy.
Stay Positive
In written notices and live conversations, tell clients you want to resolve payment problems quickly so you can keep doing business together. Ask open-ended questions that will help you find out what’s happening on their end. You may learn they’ve lost a major source of revenue or suffered staff disruptions that affect daily operations (including bookkeeping). Listening and showing empathy won’t make the outstanding debt disappear, but it can establish common ground that can lead to solutions.
Document Everything
Enter each conversation thinking about possible answers for what is essentially a shared issue. For example, you might propose that your client pay part of the outstanding balance now, with an agreement to clear up the rest by a specific date. Or you could offer a modest discount for paying in full within 10 to 15 days. Don’t rush to offer solutions, but aim to leave the conversation with a concrete plan in place.
Always send a letter or email (or both) to confirm what the client promises to do and enter detailed notes in your CRM or billing system to document your conversation. Later on, if you decide to refer the matter to a collections expert, you’ll have a complete history of the account, which can boost the odds of a successful outcome.
https://www.forbes.com/sites/forbesfinancecouncil/2023/05/12/for-small-businesses-prevention-is-the-best-cure-for-collections-headaches/?sh=107899708537
