Closing the deal to land new customers: it’s one of the best feelings entrepreneurs experience in their business journey. But when those same customers don’t pay their invoices on time, that sense of accomplishment quickly turns to frustration.
Whether you’re a freelancer dealing with individual clients or a gourmet chocolatier filling orders for hundreds of grocery stores, 44 percent of small businesses report that late payments negatively affect their business.
To handle late-paid invoices, small business owners can take steps to manage their relationships with their clients to encourage prompt payment. There are also a few legal actions owners can take when clients are unresponsive.
Late payments are, unfortunately, a normal part of doing business. Improving your cash flow strategy reduces the strain that late payment puts on your operations. Funding solutions like a line of credit can help you stabilize your cash flow so you can keep your business running smoothly.
Manage your clients, manage your invoices
Your client relationships are your first defense against late payment. Maintaining great communication and building a sense of mutual trust with each client is one of the best ways to make sure that you’ll be paid on time.
Growing your client base is another way to keep your cash flow healthy despite the challenges of late payments. Multiple clients provide ‘insurance’ — even if one client hasn’t paid yet, other invoices are being paid in a timely manner. Diversify your client base and make sure that you’re not just relying on one or two accounts to support your operations.
Reinforce your contracts and be firm about repayment terms
Employing thorough contracts is a good way to maintain positive client relationships. Make sure that you’re optimizing your invoicing process by setting out clear repayment terms and penalties for late payments. Here are a few ways to make sure that your invoicing process results in timely payment:
|Set Strict Repayment Terms||Charge Late Payment Fees|
|Consider tightening your repayment schedule. Simply shifting from net 60 to net 15 repayment terms can significantly increase your cash flow from your receivables.||Ensure that even if you’re not paid on time, you’ll be compensated for the resources you expend trying to get paid. Small businesses spend around 15 days a year chasing payments. You can also implement discounts for early payments. |
Keep in mind that different states have varying laws around late payment penalties, so check your local statutes before implementing.
|Build Relationships with Check Signers||Send an Overdue Invoice Letter|
|Developing a relationship with the accounting department or the check signer at your clients’ companies can provide a direct line to getting your repayment issues resolved.||When you need to reach out to your clients about late payments, you can issue an overdue invoice letter to notify them that their payment is outstanding and that they’re accruing late fees. Some accounting software, like QuickBooks, allows you to send an overdue payment notice right from your dashboard.|
Suing for non-payment
If you’ve repeatedly reached out to your client with overdue invoice letters to collect the money owed to you without resolution, you can sue your client for non-payment. The first step is issuing an official final demand for payment that outlines the amount owed plus any accumulated late fees with a deadline for the payment. In this letter, you’ll state that you’ll take legal action if they do not pay by the deadline. This document is important evidence in court.
If there’s no response to your final demand for payment, consult a lawyer (you can find a collections attorney in your area here). They will help you determine if you have a strong enough case to bring to court. A lawyer can also write a letter to your client directly, which is often enough to get clients to pay. Another option is to get a collections agency involved in the process.
Be aware that suing for non-payment or hiring a collections agency can be time-consuming and expensive, so be sure to exhaust all your other options before exploring these solutions.
Boost cash flow with a business line of credit
When your efforts to ensure that you’re paid on time still do not work out as planned, a business line of credit can help you fill in those gaps in cash flow. A business line of credit is a predetermined sum of funds that you can draw from repeatedly without reapplying. Your revolving credit line replenishes as you repay.
With a line of credit, you can free up working capital to pay your own bills and invoices on time. It can also provide the extra capital you need to make investments in your business. When your cash flow won’t quite cover larger purchases like inventory, new equipment, or hiring more team members as you expand, a business line of credit can provide those funds, which you can pay back as invoice payments roll in.
With a Fundbox Line of Credit there are no origination fees, no maintenance fees, and no prepayment penalties. When dealing with late-paid invoices, a line of credit is a great option to help you bridge gaps in cash flow.
Business line of credit vs. a credit card
Using your personal or business credit card to cover expenses while you wait on late payments might be a quick and easy solution, but there are a few disadvantages that often make a line of credit the better option for small businesses.
Credit cards often come with high interest rates. Interest can rack up quickly, especially if you’re not in the habit of regularly paying down the balance. Lines of credit often have more flexible interest rates, depending on your repayment terms.
There are many business expenses you cannot pay by credit card, including payroll and bills that come out of your account as a direct withdrawal. You may also have some suppliers that do not take credit as a form of payment. A business line of credit enables you to cover more types of expenses while you wait on unpaid invoices.
Business line of credit vs. a term loan
Term loans are also popular financing options for small businesses, and they work well when you need to cover one-time investments like startup costs or fixed asset purchases that will pay for themselves over time.
The main drawback for using a term loan to help manage your cash flow is that once you repay the balance, that money is no longer available to you. But with a business line of credit, your balance replenishes as you pay, so you can keep using the same funds over and over — even after clients pay their invoices.
Fundbox provides flexible lines of credit built for small businesses looking to manage cash flow challenges like late-paid invoices. You can choose between 12 and 24 week repayment plans, so you can choose the schedule that’s right for you and your business.
Manage your cash flow with confidence and get the funds you need to keep growing, even when your customers pay invoices late. Apply for a Fundbox Line of Credit and start optimizing your cash flow today.
Fundbox and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans and lines of credit made directly by Fundbox.