Slow-paying clients are a part of business, but what’s the best way to deal with them?
Late payments are something that small businesses are particularly susceptible to, especially if your clients are larger companies. Not only is it almost impossible to get a hold of the person who cuts your check, but they often have a business policy, as the Wall Street Journal reports, to pay small vendors late in order to conserve cash.
Another problem for small businesses, is that they tend to think that a sale is complete once the invoice is issued, but, actually, collections is the last step. Until the money is in your bank account, that sale never happened!
With that in mind, here are seven things that small business owners can do to handle a slow-paying client with diplomacy and grace!
Don’t wait until the end of the month, invoice your clients as soon as the work is complete. If it’s a large project, arrange monthly billing or even milestone billing so that you can invoice at certain stages of completion. Don’t send snail mail invoices and make your payment terms clear – “Due upon receipt” is way too ambiguous! For more invoicing tips, read: Is the Way You Invoice Helping (or Hurting) Cash Flow?
Get to know their payment process
Each business handles client payments differently. Some require a purchase order, others require approval from the person whom you do business with, and most invoices cross several desks before they land on the desk of the accounts payable clerk. If you understand how each client handles the process, you’ll gain a better idea of where potential delays may occur. Use this intel to inform your invoicing and collections process.
Re-send a copy of the invoice as the due date approaches
If you haven’t received payment and it’s getting close to the due date, it’s okay to send a reminder invoice. This is a useful prompt because it gives the client the opportunity to reassure you that it’s on the way, or expedite it if it’s slipped through the cracks.
Push for electronic billing and payment
Find out if you can move beyond paper invoicing. Are PDF invoices acceptable? Does your client have an online payment process like Bill.com (in my experience payments have been turned around in 5 days from the receipt of the invoice)? Accounting software like FreshBooks and Xero can also substantially reduce the time it takes to get paid – send invoices electronically, track whether clients have viewed them, and send automated late payment reminders.
Be a friendly, yet firm collector
If a client is serially late in paying you, place a call to the person with whom you do business. Explain that you are escalating as a last resort and wanted them to be aware that your payments are repeatedly past due. If the client has any merit at all (or just wants to avoid embarrassment), they’ll try and get some answers. With a bit of luck they’ll also connect you with the accounts payable contact so you have that POC for future issues. Ask them when the payment will be made (a definite date), make a note of it and be prepared to contact them again if payment still doesn’t arrive.
When it gets bad
If a client refuses to pay for whatever reason or has gone out of business, you may just want to cut your losses and right it off as bad debt on your taxes. Send them a formal letter stating that they are in breach of contract and that you’re suspending work. If you do intend to start legal proceedings, let them know. But don’t use it simply as a threat.
An ounce of prevention
One of the best things you can do to avoid getting into a non-payment situation is to use your contract to your advantage. Check out these tips for using your client contract to protect yourself and your money.