From bill payment, payments to suppliers, employee wages, and unplanned expenses, a business can’t run smoothly without a steady and dependable flow of income. That is why late-paying clients can be very frustrating and challenging for small businesses.
Late-paying customers can put a huge dent in your cash flow, stunting the growth of your business. Here are 5 tips on how to manage client payments and get those delinquent payers under control.
1. Set Payment Deadlines Before You Start Work or Deliver Products
Just like the old saying “an ounce of prevention is better than a pound of cure,” setting payment expectations up front can save you from chasing money later. Establishing a clear payment deadline before the work commences helps set payment expectations and reduce future misunderstandings or delinquencies.
Your customer expects a product to be delivered or a service to be completed on a certain date, and it’s fair to set payment terms according to your schedule. When finalizing the last details of the job or when you’re about to close the transaction, always discuss the payment deadline and reinforce it in written and oral form.
- Don’t automatically adopt the general 60 or 90-day deadline but rather create your own terms.
- Review your cash flow needs to determine what deadline will work for you and for the client.
- Offer installments or milestone payments if it requires extended work or large balances.
- Make sure to include payment terms in the contract.
2. Establish a Follow-up System
When it comes to collecting late payments from clients, waiting will never get you anywhere. Firstly, sometimes customers simply forget to make the payment. A friendly reminder can be all it takes to get them to pay the bill. Although making monthly or weekly follow-ups can be tiring and time-consuming, reminding your clients will help them to settle their bill.
Establishing a systematic approach to deal with your collections can help you stay organized, and this can be done by keeping a good follow-up system in place. With a great system, you can streamline collections and devote more time to growing your business.
- Use accounting software like FreshBooks, QuickBooks, and Xero to automate invoices.
- Send out email reminders regarding payments a week before the due date.
- Develop a routine for following up payments either every 3 days, once a week or every 15 days.
- Give several payment options such as PayPal, Bill.com, Venmo, or other mechanisms.
3. Use Payment Incentives or Penalties
To reduce late payments, offer incentives for early payments. Customers love discounts, even if only a small percentage. The small percentage is often justified when you consider the benefits it brings to your cash flow – and you wouldn’t have to spend extra time and money collecting money later.
Alternatively, you could impose penalties for overdue payments, but make sure that you don’t go overboard with penalties and timing because this can affect your future business with the customer.
- Decide on the early payment incentives. 2-5% discounts are common.
- Be consistent with the timing imposed on both early payment discount and late penalties.
- Detail discounts or penalties on your contract and discuss payment terms before the project begins.
- Think of late penalties as a deterrent, not as an additional source of income.
4. Prepare Yourself Mentally
If you have to have a discussion with a customer who hasn’t paid, despite follow-ups, be sure to be prepared for the conversation. Some late-paying customers will have all kinds of excuses to delay payments, and it is very important to prepare yourself mentally and have a full record of due dates and what is owed. Unpreparedness can show your apprehension or nervousness and might send a signal that indicates you are not really committed to collecting the payment.
Remember that you don’t need to gear up for battle. Just be in the right frame of mind to prove your stand. You are not the bad guy. The customer has a responsibility to pay for the products received or services rendered. If they owe you money, you have the right to claim what is due. But remember:
- Be friendly but professional.
- Show some understanding but stay firm.
- Anticipate both positive and negative reactions.
- Assign the task to someone else if collecting payments isn’t your forte.
5. Be Professional
Last but not least, always keep your cool and no matter what happens, stay professional. Although it is a given fact that you need to be paid, be open to hear explanations and show some understanding, as there are things beyond our control.
Losing your temper won’t bring clients rushing into your office to make payment – in fact, you might not get paid at all. The disruption of cash flow due to late payments can affect your business, but adding anger to the situation will only drive a wedge between you and your client.
- Be patient and demonstrate goodwill, but be firm with your decisions.
- Maintain a cordial relationship with late-paying customers as a sign of respect.
- Practice some relaxation techniques such as imagery and diversion to keep your patience.
- Make amends and learn the art of giving second chances for valid circumstances.