Late-paying customers and customers who don’t pay have a negative effect on your cash flow and your bottom line. Here are strategies minimizing late payments and non-payment and tips to help with debt collection from past due accounts.
Chances are most of your customers usually pay you within a reasonable amount of time. But sooner or later – either because of the economic downturn or a particular company’s misfortune – you will have to deal with a customers or clients who pay very slowly or not at all.
What can you do to get those customers to pay the invoice – and pay it on time? And just importantly, what can’t you do to collect the money owed you? Here is what you need to know about getting paid and debt collection.
Run a Credit Check
First things, first. Fend off debt collection problems from the start by running credit checks on all new clients and customers if a significant amount of money will be involved. (Say, $500 or $1,000 or more). If the customer has bad credit, either don’t sell to them or ask them to pay in advance for what they want to purchase. If they want or need your product badly enough, they will pay upfront. If they don’t have the cash to pay up front, you run the risk of never getting paid.
Be Upfront About Pricing and Use Contracts
Be sure you discuss your prices, service fees and payment requirements with new customers before you do their work. If you work on a retainer basis or provide services under a contract, make it clear what services you will charge for, what deliverables the customer will get for the fee, and what work will incur additional charges. Be sure to let the customer know how often you will bill and how long they will have to pay each bill. Put it all in writing and be sure to include a section about your rights and responsibilities regarding ownership of products, intellectual property or records of work you perform if bills are not paid. (Have your attorney draw up a boilerplate agreement that will work for most customers or clients.)
Related: Creative Cash Flow Strategies
Don’t wait until the end of the month to send out your invoice. Bill your customers and clients as soon as the product or service is delivered or when pre-arranged milestones are reached. In general, the faster you send out an invoice, the faster you’ll get paid. If you send printed invoices in the mail, be sure the client can tell that your mailing is not just another routine reminder. You may want to stamp the envelope “Invoice Enclosed” so it doesn’t accidentally get thrown out.
Follow the Client’s Procedures for Submitting Invoices
Some businesses have specific procedures that must be followed when you submit invoices. You need to know who to send your invoices to, whether they should be sent electronically or in snail mail, and what should be included on the invoices (a purchase order number may be required, for instance).
Offer a Discount for Early Payment
Make any discount for early payment (say a 2 percent discount for payment in 10 days) prominently visible on your invoice. Big businesses may act sooner on such invoices to keep costs down.
Keep an Eye on Receivables
Send out reminder notices promptly to any client who doesn’t pay within a predetermined time frame – usually ten to 30 days. The longer you wait, the longer it will take to get paid. Your reminder notice can help get an invoice unburied from a client’s inbox, or get attention if the original was misplaced or never received.
Call the Customer
If a client still doesn’t pay within a set time (15 days, for instance) after reminders are sent, have someone from your accounts receivable department call the late-payer and try to determine the cause. If you don’t have an “accounts receivable department” have a spouse, secretary or bookkeeper play the role. If the customer is one you want to keep and is worth keeping, using such an intermediary will make it easier to maintain a good working relationship with the customer after the bills get paid.
Offer Installment Payments, If Necessary
If the company or individual is having a financial problem, offer them a chance to pay you in installments. Ask them to send a portion of the amount you’re owed now, and then work out a schedule to collect the rest of your money. Be sure someone on your staff follows up to be sure the payment schedule is met.
Don’t Accept New Orders Until You Get Paid
If a customer is late paying you but still calling you for new orders or assignments, politely let them know that you appreciate their business, but you can’t accept any new work or orders until you’re paid what you’re owed.
Use More Aggressive Debt Collection Methods
If those initial attempts at collecting do no good, consider more aggressive means to collect what you are owed:
- File suit in small claims court. You don’t need to hire an attorney to sue in small claims court, so if the client is nearby (you have to go court where the client is located), this can be a low-cost way of pursuing your claims.
- Contact a collection agency in your state and let the collection agency tackle collection. Find out in advance what the collection agency will charge for its services and call the Better Business Bureau to make sure there are no unresolved complaints against the collection agency you plan to deal with.
- Have the collection agency report the debtor to credit reporting agencies.
- Retain the services of an attorney if the amount is significant enough to warrant the attorney’s fees and attention.
What NOT to Do
Don’t tell your friends at the weekly Rotary meeting that the customer is a deadbeat, and don’t post to Facebook and Twitter that your customer is a bad credit risk. If you do things like that, you can get yourself sued. You can also get yourself into legal hot water by making threats, using harassing or abusive language, making collection calls at odd hours or too often, or by making false statements about what will happen if the debtor doesn’t pay.