Some clients pay within days of submitting an invoice. Others pay near the end of the 30 days. Both types have been in business for years and continue going strong. Still, those who put off payment until right before the standard 30-day deadline have a slight edge. They keep the money longer.
Occasionally, a client or two would pay late. Fortunately, some businesses have enough cushion that they aren’t affected but not everyone is in the same boat. It hurts the business when they get paid late.
And late payments are one of the biggest causes of B2B small business owners’ headaches. Despite having plenty of business, a company can find itself in trouble simply because of timing. Cash flow management timing. When a business owner pays suppliers late, those suppliers pay theirs late. It’s the domino effect, which causes cash flow problems for small businesses down the line.
According to the 2015 State of Small Business Report based from Wasp Barcode Technologies, many business owners wrestle with cash flow. For companies with 11 to 50 employees, 42 percent say that cash flow is one of the top five business challenges. Twenty-one percent say getting working capital is one of their hardships. These two big factors affect the other top challenges, which include growing revenue and increasing profit.
Atradius Payment Practices Barometer reports that 38 percent of U.S. B2B small businesses are not paid on time. Almost one-third of the respondents struggle with having enough cash flow.
Let’s make sure your company is in the 62 percent who get paid on time with these seven tips.
1. Do credit checks.
Before financing any client, the Capital Solutions Bancorp team runs a credit check on clients and some of their customers. This ensures they see payment within 90 days. It also lets them know if the customer’s credit has recently changed and allows them to be proactive.
2. Add discounts and penalties to contracts.
Aside from describing the deliverables the client expects from you, contracts should also document when the client must pay you for your deliverables. For extra motivation to pay on time, add a section that offers a discount for early and on time payments and penalty for late payments.
3. Send invoices on a scheduled basis.
This depends on whether you’re a product or services company. Product companies often require half up front and the other half on delivery. For this, include the invoice with the delivery. Hold off on starting work for clients who haven’t paid up front.
Services businesses select a day of the month and invoice on that day every month. It can be the 15th of the month or the second Friday of the month. Whatever you choose, stick with it and make sure the amount owed is clearly visible on the invoice.
4. Contact your client.
It’s understandable that you have a good relationship with the client and don’t want to do anything to jeopardize it. Nevertheless, clients who pay late are putting your business at risk.
Contact the client to find out what’s going on and why payment is late. You could offer to stop by to pick up payment, find a compromise or discuss another way to pay. Some clients may need a friendly reminder call three or four days before payment is due.
5. Send a collection letter.
Create a collection letter and send it 30, 60 and 90 days past due, or on a schedule that works for you. Each letter should get more serious, and that’s where attorneys can help. They can word the letter explaining the legal consequences of a client not paying or responding by a set date.
6. Use a collections agency.
Not all debt collection agencies use strong arm tactics or live up to their less than stellar reputations. Capital Solutions Bancorp offer collections as part of its financial services to help businesses stop stressing and start growing.
When contacting the client’s customers, the team makes sure that they don’t affect the client-customer relationship. When customers go this long without paying, it may not be worth keeping their business.
7. Consider flexible funding.
You won’t have to deal with Steps 5 and 6 if you look into working with a company like Capital Solution Bancorp that provides flexible funding. Clients using their services get paid immediately after making the sale instead of dealing with the anxiety of collecting payments. Skipping the time spent on writing letters and dealing with collections means more time to grow your business.
When a client has forgotten about an invoice, I send a friendly email letting the client know the invoice is past due and if he or she needs anything from me. They follow up every single time. Things distract them or it didn’t reach their employee who is responsible for cutting checks. It happens. And this hasn’t affected our relationship.
What steps have you taken to avoid late payments? What other ways can you prevent late payments?