Imagine your customers asking you for a loan. They want you to not only lend them money but they don’t want you to charge them any interest; AND, they want several months to pay you back. When you allow customers to owe you money, your accounts receivable, and they don’t pay you back for two or 3 months, or even longer, that is what you have done. You have given your customers an interest free loan.
The negative part of this is that you don’t have the cash to operate your business. You don’t have the cash to pay your bills, pay your employees, pay your rent. You may not even have the cash to pay yourself. That is not the reason you went into business.
There are many things you can do the remedy the problem of slow paying customers How you manage your accounts receivable, how your structure them and even how you allow some customers to pay you over time is entirely up to you. Yet obviously the faster you are paid for your goods and services, the better off your business is.
Things that you can do to better manage your accounts receivable are:
1) Send out bills as quickly as you can. You want to be paid within the first 30-days and that means cash in your hand, not when your customer decides to process the payment. Indicate in your bills that payment is due, in your account, no later than 30 days after the bill. Further, show that interest will be paid for any late payment.
2) Make certain your invoices are correct and provide your customers with the proper address to mail your payments do. Eliminating these errors and giving correct address eliminates any excuses for not paying
3) Offer more than one method of payment. Cash is good but so are checks and credit cards. Another method is ACH payments directly into your business checking account. The small fees you may pay for some of these is better than no payment at all.
4) Establish a collection process for every account. Don’t wait until payment is past due. Have an action plan and use it when necessary.
5) Contact your customers immediately when a payment’s due date has arrived and they have not paid. Don’t depend on emails, letters or other communication methods that can be ignored.
6) How you approach your customers for payment is important. If you don’t have someone on your staff trained in how to ask customers for money then find an employee with client friendly skills to make these calls. If you treat your collection calls like normal customer service events instead of collection calls, you have a better chance of collecting your money and not losing customers. However, don’t be afraid to lose habitually slow paying customers. You don’t need them because the money you are losing you may have never had anyway.
7) Develop good relationships with your customers. If you keep your relationships with them positive they are less likely to not pay you on time. Good relationships are a key ingredient to business and having them can improve the cash coming into your business.
8) Sometimes, no matter what you do, some customers will be unable to pay you as scheduled or promised. It is okay to be flexible but you must also be firm. You may have to work out a repayment schedule but hold your customers accountable for meeting them. It is, after all, their obligation to you.
9) Don’t be afraid to make repeated calls to collect. It is not uncommon for customers to pay you if for no other reason than to stop you from calling.
10) Consider factoring your receivables. Factoring is a transaction in which a business sells its invoices, or receivables, to a third-party financial company known as a “factor.” The factor then collects payment on those invoices from the business’s customers.
Factoring normally works the following way:
- The business writes an invoice to the customer, instructing the customer to send payment to a third party – the factoring agent.
- The factoring agent pays the business a portion of the invoice immediately and another portion when the bill is finally paid by the customer.
Factoring agents earn their fees by charging a percentage of the invoice as a fee. For example, on an invoice, the factor might charge a 5% fee, reducing the amount of money they give you by 5%.
It is your business and you depend upon the money from your business to provide for yourself, your employees and your family. Don’t give away your business by giving away your money.
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