Economic downturns mean more people tend to pay late, or not at all. Determining how best to approach late payments can be tricky, especially if you're worried about losing a longstanding, valuable customer. Learn how to strike the right tone with customers and identify them before they become a recurring problem.
Small businesses are particularly hard hit by the dilemma of late payments because customer loyalty is such a big factor in remaining sustainable. But is a loyal, late paying customer better than no customer at all?
A good way to keep yourself from sinking too deep into this problem is figuring out how profitable your customers really are in the first place**.**
**How much is each customer worth? **
First, you need to maintain and monitor your invoice records so you know when payments are due. There are billing systems and software out there that are good tools for this, but a spreadsheet will do as well. Once you have your records in order, look at customer histories to determine how profitable each one really is.
Are some continually late while others are not? Don't only look at revenue generation. Net profitability is what you're really after, since that will give you a better idea of whether you're better off keeping this customer or not.
When trying to collect late payments, e-mail reminders, phone calls and voicemail messages can only go so far. If your customer is another small business, arrange to meet in person. Don't make it seem confrontational but ask to just have a chat about how things are going. Respectfully try and figure out the real source of the late payments and come up with a plan together that fits the situation.
For instance, if your customer is having cash flow problems, try different billing options, such as quarterly instead of monthly cycles or using credit cards if that's not the norm. Sometimes accepting payment in kind instead of cash can also be a good solution.
Remember, the key is not to be threatening. Don't throw down an ultimatum but always offer choices. On the other hand, your time is valuable too. Make sure you speak to someone in charge because late payments can pose a serious risk to your business.
Offer incentives for early payment
There are a number of tactics that you can implement in your business to head off late payments before they happen. Offering reduced rates for early payments sets a good precedent. You could also offer other incentives for paying in full and/or in cash at the time of order or delivery.
Whenever you agree to a big project, make sure you have instituted incremental payment points throughout the duration of the project.
In general, you want to set strong guidelines that are clear to all customers before any complications arise. Clearly state when you will stop doing business with a customer for slow or consistently late payments. Clearly communicate to customers that your business has decided not to grant credit, and that paying upfront is now required. Stick to your guidelines and communicate them effectively and respectfully to your customers.
As always, legal action should be a last resort. Don't spend $10,000 in legal fees just to recoup $1,000 in late payments. You're better off just cutting your losses--and the late paying customer. Above all, lay out your payment policy very clearly in your agreements, build relationships with your customers, and always be proactive when it comes to billing.
Have you run into this issue in your business? What worked for you?