How to Deal with Slow-Paying Customers

Dealing with slow-paying customers can be a major headache for business owners. This is a bigger challenge for small companies that don’t have employees dedicated to collections. Ultimately, slow-paying customers affect your cash flow and distract you from running the business.

Improving your invoicing and collections is not difficult, but it takes some discipline. The process has three parts:

  1. Making it easy to pay you
  2. Selecting good customers (and avoiding bad ones)
  3. Using a solid invoicing and collections process

Making it easy for customers to pay you

It is unfortunate that, in this day and age of online payments and great customer service, some companies still make it hard for customers to pay them. Common problems include accepting only a single form of payment (e.g., check), not accepting credit cards, not accepting online payments, and having confusing invoices, etc.

Fortunately, fixing this problem is fairly simple and straightforward. Look at your payment process through the eyes of a customer. Is it easy and convenient for your customer? If it’s not, you have a problem.

Make your invoices easy and clear to understand. Ensure clients have multiple ways to pay you. Ask your clients about their payment preferences. Most will be happy to tell you. In the end, you may be required to support a number of payment options, but the effort will be worth it.

Selecting good-paying customers

Many companies, especially small businesses, are willing to take on any customer who is willing to buy from them. Unfortunately, customers are not created equal. Some are great clients and good payers. Others are just the opposite.

The best way to avoid bad payers is not to work with them in the first place. Consequently, screening good-paying customers before you engage them is key. The best way to determine if a client is a good payer is to review their commercial credit.

Commercial credit reports are incredibly useful and easy to use. Most include important details such as a suggested credit line and short-term financial strength.

Unlike personal credit reports, anyone can get a credit report on a business. Companies that offer commercial credit reports include: Dun & Bradstreet, Experian, Cortera, and Ansonia. If you’re making a very large sale, you should use the reports from more than one company to make a decision. For more information, read “How to determine the creditworthiness of a customer.

Managing your invoices and payments

Selecting good clients and having a simple payment process goes a long way in improving your cash flow. However, you need one more thing. You need a reliable process to manage invoicing and collections. The process does not need to be complicated to be effective. You just have to follow it with discipline. Here is an invoice collections process we have found to be effective:

Step 1: Use a contract for every sale

Making a commercial sale without a contract can be risky. If something goes wrong, you will have little (if any) recourse. Instead, you will be better off using a well-written contract that includes a clear payment clause.

In some cases, you may have to use your client’s contract instead of yours. This is common when working with larger clients. In those situations, read the payment clause of that contract carefully. You will have to follow it, to the letter, when it is time to collect.

Step 2: Use an acceptance letter

In our opinion, an acceptance letter is one of the most valuable, yet underused, collections tools. It is a letter that your customer signs after you have delivered your product/services. In this letter, they acknowledge that they are satisfied with the delivery.

The letter helps you in a couple of ways. If the client refuses to sign it, you know that there is a problem and you can address it at that point. If they do sign it, you have written verification that the customer is satisfied with the service/product. The acceptance letter should be referenced in the contract (see step 1) and crafted by an attorney.

Step 3: Send the invoice promptly and verify it was received

Send an invoice to your customers shortly after delivering your product or service. Include all the necessary paperwork for payment. This varies by situation and can include copies of the PO and other items. If you are using your client’s contract, make sure you include everything the contract asks for.

Follow up with a call/email to verify that the invoice was received. This communication helps reduce the number of late payments you get because an invoice was misplaced or “never received.” Additionally, include a copy of the signed acceptance letter. This step helps the accounts payable person understand that the service/product was delivered and accepted by their company.

Step 4: Call if invoices are past due

You should call your customer if their invoices are past due. However, you should consider giving them a few days as a grace period, just in case they sent the payment at the last possible minute.

Whenever you call a customer, you should be polite, gentle, and, above all, professional. Usually, this approach will get you a quick payment and solve the problem. If they still can’t or won’t pay after the call, then one of three things may be happening:

a) The client has a dispute

This is where things get more complicated. If your customer refuses to pay because of a valid dispute, you should strive to resolve the matter professionally. Mistakes happen and it’s up to you to solve them to keep your reputation.

Some clients may have unreasonable disputes. They may even use disputes as a negotiation tactic to get a discount or another concession. If the dispute is unreasonable, show them the signed acceptance letter. This approach often settles the matter. If it doesn’t, consider seeking legal advice.

b) The client can’t pay

Ideally, running credit reports helps you avoid most of these situations. Client’s that can’t pay require a judgement call. If the customer is in a temporary cash flow crunch and wants to pay but simply can’t, you should consider offering a payment plan. Otherwise, you need to seek legal counsel.

c) The client does not want to pay

One of the most challenging situations for a business owner is handling a customer that does not want to pay even though they received the service and are satisfied with it. Unfortunately, this does happen from time to time. Using credit reports reduces the chances that this will happen. If this situation arises, consider hiring an attorney to advise you.

How to get paid faster using financing

One of the main challenges with commercial sales is that it often takes 30 to 60 days to get paid. You can have great customers that always pay within their terms. But if their terms give them 60 days to pay, you still need to wait two months before payment. This delay can create cash flow problems for companies that don’t have an adequate emergency fund.

An alternative for improving your cash flow is to use invoice factoring. Factoring is a form of financing that provides an advance against your invoices. In most cases, the factor buys your invoices and pays you upfront for them. Factoring can reduce your time to payment from 30 to 60 days to just a few days.

Most factors finance invoices in two installments. The first installment is called the advance and covers around 85% of the invoice. The remaining 15%, less the factoring fee, is rebated as a second installment once your customer pays in full. Unlike other solutions, factoring financing is relatively easy to get and can be very flexible. To learn more, read “What is factoring?” and “How does factoring work?

Get a factoring quote

We are a leading factoring company and can provide you with high advances at low rates. For information, get an online quote or call (877) 300 3258.

Disclaimer: This article is provided for informational purposes only and does not provide legal or financial advice. Please consult an attorney or CPA if you require legal or financial advice.