Preventing Late Customer Payments: 5 Tips for Business Owners
Late customer payments have the potential to significantly impede a company’s cash flow — and if you treat cash flow as your business’s oxygen, your employees and your vendors can all be at risk. As far as priorities go, you can’t get more urgent than that.
What can you and your business do to protect against late-paying customers? Read on for helpful tips and steps to take (some proactively) to minimize your risk and ensure that invoices for goods or services performed don’t languish indefinitely in the customer’s inbox.
1. Clarify Expenses and Payment Policies
Regardless of the product and/or industry, it’s a good idea to ensure your customers understand your payment policies. Prior to getting started, meet with them and review your anticipated costs for a new project, detailing where and how expenses will be incurred. Then, describe your invoicing system and clearly outline the consequences for any late payments (i.e., an initial warning five days after the invoice due date, a late fee after 15 days, etc).
This is the ideal time to hear out any possible customer objections or to help resolve issues before they arise.
2. Offer a Wide Spectrum of Payment Options
The easier you make it, the fewer hassles you’ll likely encounter in terms of late customer payments. When establishing your online checkout system, for example, select a payment processing avenue for customers that supports — at a minimum — credit cards, PayPal direct and electronic checks.
Unsure which payment methods are most likely to appeal to your target customer base? The answer is to ask them. Sending a short survey to customers will help identify expectations and how they prefer to pay.
3. Understand the Client’s Invoicing System
In the B2B realm, clients have differing systems to accept and reimburse invoices. If you neglect to pay attention to these specific policies, you may actually encourage late payments. So, it’s critically important to understand their systems up front, prior to submitting an inaccurate or incomplete invoice.
Key details to establish include:
- A required purchase order number.
- To whom the invoice should be addressed.
- Any other details mandated by the client’s accounting department.
In particular, sending the invoice to the right person or department is essential. If your client is a large company, an incorrectly addressed invoice can get lost in the system for weeks or longer.
4. Don’t Delay in Submitting Invoices (and Follow Up)
The principle is simple: the sooner you submit invoices following a sale or completion of a project, the quicker you’ll be paid. Doing so promptly also helps avoid the possibility that you or your team might, with other issues pressing in, forget to submit the invoice.
It’s likely you’ll encounter problems at some point. That’s why it’s important to establish an internal process for following up on past-due invoices. After the due date comes and goes, send a brief, polite reminder that lets the customer know you are expecting payment.
The next reminder, while remaining polite, can take a stronger tone. Make sure the customer has all the necessary information to complete payment (amount due, invoice number, a copy of the invoice, etc.).
If needed, subsequent follow-up efforts might include a phone call to the customer. This can sometimes clarify the customer’s reasons for delaying payment and smooth the way to an amicable resolution. Also, this may be the point at which you agree to accept partial payment on the amount owed or set up a repayment process that extends out for several months.
5. Provide Incentives to Ensure Payment
Some customers will be more compliant with payment if an incentive is offered. If, by paying on time, they see a small discount on their invoice, the potential long-term savings can be sufficient motivation to pay promptly. According to CBS News, options include asking customers to “make advance payments, follow consistent collections processes or make small, incremental payments towards their invoice.” CBS cites the 2/10 rule, which offers customers a two percent discount for paying within 10 days.
As a very last resort, you can attempt to find a legal solution. When past-due invoices are 90 days or older, the prospect of legal action may be necessary to seek and receive payment. When small figures are involved, taking the matter to small claims court may be the best option. In these cases, be aware that your actions could lead to severing the customer relationship, but that may already be the case if the customer is routinely guilty of late or missed payments.
Avoiding Business Risk
Chasing after customers to pay for products or services rendered is among any business owner’s least favorite activities. However, as noted, a lack of payment translates into a lack of cash flow, which puts your business in danger. So, taking action at this point — in a respectful manner — is beyond debate.