Are half of your customers paying late? If so, you’re definitely not alone.
According to Atradius, nearly half (47.1%) of domestic B2B sales on credit are paid late. In fact, D&B reports 3.5% of payments are made 90 or more days late. Depending on the businesses you examine, the situation could be even worse: according to our own analysis of 20 million invoices, 64% of small businesses are affected by late payments.
Given all that, we know late payments are a major problem for small business owners. So how can you help your business beat the odds? Here’s a three-stage system for tackling late-paying customers.
Late paying customers: Stage 1
Send an advance reminder.
Many small business owners find it helpful to remind customers of upcoming payments a few days in advance. Create a standard email you can send to customers to alert them. Customers often appreciate this reminder, which helps them keep their own cash flow under control.
Follow up on late payments right away.
Develop a system for contacting late-paying customers. You can start by sending them a standardized email the day after payment is due. Then, follow up with a phone call the next day. Many accounts receivable software programs have customer relationship management (CRM) features that allow you to automate emails and reminders.
Keep track of the status of late payments and make sure your team is all up to date. You don’t want a customer to get a call from your business after they’ve already resolved the issue in an earlier call with a different member of your team. Use your accounts receivable software’s CRM features to document interactions with customers so your whole team has access to current status.
Often, late payments are due to misunderstandings with your invoices. Even though you might be feeling a lot of frustration, try not to take a combative tone toward the customer. Always be polite in drawing their attention to the late payment.
Find out when you can expect the payment and make note of it.
Late paying customers: Stage 2
In most cases, a few gentle reminders are all you’ll need to get paid on time. However, if your customer still isn’t forthcoming, you’ll need to take additional action. Don’t delay, because the longer you wait, the less likely you are to get paid. Here’s what to do:
Get back on the phone.
Phone calls are often more effective than emails or even “past due” invoices because they’re harder to ignore. Be persistent until you actually speak with the customer in person.
Find out what is causing the delay.
Encourage the customer to be honest with you. Is there any problem with the product or service you delivered? Do they have any financial issues preventing them from paying?
Once you know what the problem is, see if you can work out a solution. For example, can you set up a monthly payment schedule? If the work is unsatisfactory, can you redo it or receive partial payment?
If your customer is honest but cash-poor, a Fundbox line of credit can help you tap into those outstanding invoices to improve your cash flow until they’re able to pay.
Late paying customers: Stage 3 (Red Alert!)
If you’ve tried the steps above and haven’t come to a resolution, you’ll need to make some tough decisions. Do you take the customer to Small Claims Court? Do you turn the issue over to a collections agency or try selling the invoices to a factor? Do you give up and write off the unpaid receivables as a loss on your taxes?
What you do will depend on factors like the value of the invoice, your relationship with the customers in question, and the rest of your business cash flow picture. Your attorney or accountant can help advise you on your best course of action.
If you do receive payment, but only after a long struggle, you might want to update how you work with that customer in the future. For example, you might institute stricter payment policies, require partial payment upfront, or cash on delivery.
While it sounds simple to set stricter credit terms before advancing credit to new customers, we know it’s hard to put into practice. To help minimize the impact to your cash flow while waiting for customers to pay their invoices, consider turning to a Fundbox line of credit, which can allow you to draw short-term liquid cash based on the anticipated revenue from outstanding invoices.