One of the biggest challenges for business owners is managing the company cash flow. If you’re a first time entrepreneur, you will soon learn that above all else, cashflow is king. It’s up to you and your team to quickly put practices and policies in place that promote the healthy movement of capital in and out of your bank account. If you’re still a relatively small business selling to larger corporations, it’s likely that you’ll be at the mercy of their payment terms until you get big enough to demonstrate your value and flex your muscles. In the meantime, there are a few things you can do to mitigate the risk of slow-paying customers. Here are four tips for handling late payments:
1. Automate your invoicing
If you notice that payments are slow to come in the door, the first step is to make sure your invoices are going out quickly. It can be difficult to stay on top of billing, especially when you’re a small team that is moving fast to overcome innumerable obstacles. Take a bit of pressure off your employees and find an automated invoicing solution so you never forget to bill a client and always do so in a timely fashion. It will help ensure nothing falls through the cracks while you’re running a million miles an hour and also give you the reassurance that you’re upholding your end of the business relationship. If you can confidently say that your invoices are going out on time, it will be easier to have those tough conversations with slow payors down the road.
There are lots of invoicing solutions you can choose from—many of which are free. Even if you’re a small business, it’s easy to find something that fits within your budget. Mashable put together this list of 27 free invoicing resources, which is a great place to start comparing tools.
2. Set a clear payment policy
If you haven’t already done so, set a clear policy that outlines payment terms as well as steps and fees associated with late payments. Small businesses may be at the mercy of their debtors invoicing terms in the beginning, but that doesn’t mean you can’t establish clear expectations and put policies in place that protect you from extremely late payments. By creating clear guidelines for both you and your customer, you will have something to point to if/when you need to talk to a client who isn’t getting their checks in the mail on time.
Freshbooks conducted a study surrounding their payment terms and found that using specific language in their invoices helped them get paid faster. The main takeaways are:
- Use specific language surrounding your time frame (i.e. 21 days versus net-30)
- Be polite:Using please and thank you increased invoices paid in a given period by 5%
- Charge interest on late payments: Don’t be afraid to set up systems to deter overly-late payments
In the beginning, you may have to be more lenient than you would like to. But when you prove your value and gain a bit more clout, you’ll likely be able to revisit and negotiate better terms.
3. Know your next steps
Create a roadmap your team can follow if/when a late payment occurs. Take the guesswork out of how and when you should be contacting your clients by establishing a step-by-step guide. It will usually look something like this:
- Step one: Send a reminder letter. Determine your timeframe and decide if you want to send it a few days, a week, or 15 days, etc. after a late payment has been flagged.
- Step two: Pick up the phone. If you’ve sent your follow-up letter and still heard nothing a few weeks down the road, determine when is the right time to pick up the phone and call your accounting contact. Be polite and try to determine if there is an underlying reason behind the late payment. Make note of who you speak with and when you called in case you need to reach out a second time.
- Step three: Offer to set up a payment plan. All businesses face cash flow challenges at one point or another. Large businesses aren’t necessarily an exception. If there is a reason why your customer cannot feasibly repay the full invoice at this point in time, offer to setup a payment plan so you can recoup at least a portion of your cash. It might put a strain on your business, but it’s better than losing the entire payment.
- Step four: Take legal action. If you’ve been through steps one, two, and three to no avail, it’s time to reach out to your legal council. You may need to hire a collections agency or consider small claims court. You’ll have to determine if it’s worth the legal fees, but it could get you some portion of the payment.
4. Consider cutting your slow payor loose
If you have a client who routinely pays excessively late, consider that a breakup might be the best strategic move for your company. Slow payments can be murder on your cashflow and more often than not these customers are the same ones taking up a majority of your team’s time and effort. While it may not seem like the best idea to fire a paying client when you’re so small, it’s also not feasible to scale a company when these poor conditions are stagnating your growth. Check out these great scripts you can follow if you need to break up with problem clients.
These tips for handling late payments should help ensure that you have a healthy stream of cash flowing into the business while you grow. If you’re scaling quickly, you may still experience shortages. You’ll want to decide if you plan to grow at a fast pace or if you’re building a business you want to run long into the future. If you’re in the first category, you’ll need to find other sources of capital that can scale with you as you expand operations. That’s where we come in. Check out our quick quote tool and learn how much money you could get to help you grow your business.