There is nothing more frustrating than rendering your services or delivering your products only to have to wait for payment. With the slumping economy since 2008, small businesses have experienced longer account receivable delays, with an average payment rate of almost 50 days after invoicing.
While it is tough for many businesses, that doesn’t mean your business must suffer unreasonable delinquent payments. How can you ensure timely payment from your clients and customers? Here is a list of best practices:
Clearly Make Known Your Payment Policies
One reason many clients fail to pay invoices on time is that they simply are not aware of the vendor’s payment terms. Therefore, make every effort to be sure your clients know the expectation of payment in terms of payment type (cash, credit, check, etc), time (upon delivery, net 30, etc), and any late charges that may be applied if payment is not received within the time frame.
If your payment policies are clearly defined at the beginning of a client relationship, there is no reason for them to come back to you saying, “sorry, we didn’t know your policies.”
Require a Credit Check for Invoicing
If you do not collect full payment at the time services are rendered or upon delivery of products, you are extending credit to the customer. Many businesses request to be invoiced after the fact. That means you have the full right to require any client or customer to apply for your credit.
The best method is to create a simple one-page application form for those who request it. Other businesses will sign it and include their Social Security number if a sole proprietorship, or TIN if a registered business like a LLC or corporation. Use that SS or TIN to run a credit check through the major credit reporting agencies, and do not hesitate to deny credit extension and demand payment up front to businesses that do not pass your standards.
Require a Deposit
One method to ensure that you get paid at least a portion of your invoice is to require payment up front. You might ask for a 30-50% deposit before shipping or before services begin. That way, the client pays late on an invoice, you’ve already received a portion to cover your expenses.
Encourage Credit Card Payments
Credit card payments are easy to set up for both brick-and-mortar stores and online transactions. However, many businesses do not like to use credit cards because of the heavy fees imposed by the merchant banks. With monthly charges and per-transaction fees, the total profit can be eaten away quickly.
However, consider the money you lose if you require payment by check or money order, but your clients do not pay for months after delivery of product or service. With credit card payments, you know right away that the money is there and in your bank.
Offer Discounts for Early Payment
Do you encourage early payments with a discount? Normal invoicing tradition for almost every industry is to offer a discount if the invoice is paid within 10 days, but the full balance due within 30 days. Often the discount is 1% or 2%. For instance, if you offered an early payment discount of 2%, you would state on your invoice: “2/10 n/30”.
Develop an Invoice Follow-Up Process
Another reason small businesses have a high percentage of outstanding and delinquent invoices on the books is that they simply do not have a process of following up and demanding timely payment.
Develop a method of tracking each invoice when it is created, when it is due, sending delinquent notices immediately (1st, 2nd, Final Notice, etc), and when the invoice is paid. Also, if you do instill a late payment fee, be sure you clearly notify the client of the extra that is due.
Report Delinquencies to Credit Agencies
When it comes down to it, you may have to be the bad guy when clients pay late. If you have late payments up to 30, 60, 90 days and more, you have the right to report it to the major credit agencies. Be sure you notify each client of your intention to do so if the invoice is not paid immediately. This usually results in many severely delinquent invoices getting paid before you actually follow through with the threat.
Finally, when worse comes to worst and you have simply lost a client to the abyss of unpaid invoices and notices, it may come time to call in collection agencies. You don’t have to pay the collection agencies any fees, but simply pay them a percentage of the monies they collect from delinquent accounts.
