Dealing with Slow-Paying Customers

Dealing with slow-paying customers can be a major headache for business owners. Slow-paying customers affect your cash flow and distract you from important matters. And if you have too many slow-paying customers, your business could encounter problems and risk missing critical payments for suppliers or payroll.

This leads us to the question – what is the best way to deal with slow-paying customers? The best solution, of course, is to prevent them from becoming slow-paying customers in the first place by:

  • ensuring that you offer payment terms only to customers that deserve them
  • having a strong receivables management process

While this may sound complicated, it’s relatively easy to do. And if you execute this strategy correctly, the payoff should be great.

Selecting Good-Paying Customers

Selecting good-paying customers is more of an art than a science. Nevertheless, many companies successfully use commercial credit reports to figure out the creditworthiness of their customers.

Unlike personal credit reports, anyone can get a credit report on a business. These reports can be a critical tool for selecting good clients because they give you a general idea about a client’s financial strength. More importantly, however, these reports give you a good idea of a client’s payment habits. Many commercial credit reports also include a suggested credit line.

Some companies that offer commercial credit reports include (in no particular order): 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. Needless to say, these reports are not perfect and should not be the only tools used to decide whether a customer will be a good payer.

Managing Your Invoices

The next step is to create a process to track and manage your invoices. This process may sound complicated, but it can be implemented relatively quickly. Here are some suggestions:

  • Use an acceptance letter. In our opinion, an acceptance letter is one of the most valuable, yet underused, tools. Your customer signs this letter after you have delivered your product/services. In this letter, they acknowledge that they are satisfied with everything. If they refuse 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. Obviously, you should use an attorney to craft a proper letter for you.
  • Verify that your invoice was received. You should invoice your customers shortly after delivering your product/service and then follow up with a call/email to verify that the invoice was received. In an email, it’s a good idea to include the acceptance letter – especially if you’re dealing with large companies. You’d be surprised how many “late payments” happen simply because an invoice was misplaced or “never received.”
  • 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.
  • What happens if there is a dispute? This is where things get more complicated. If your customer refuses to pay because of a dispute, you should strive to resolve the matter professionally. However, if the dispute is unreasonable and you also have the signed acceptance letter, you should use the letter to demonstrate that they accepted the product and were satisfied with it. If the dispute still does not resolve easily, you should consider seeking legal counsel to advise you of your rights/responsibilities.
  • What happens if they can’t pay? This situation can be difficult to handle as well and basically requires a judgment 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.
  • What happens if they don’t 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. Believe it or not, this does happen. In this case, consider hiring an attorney to advise you.

What to do if slow-paying customers are creating financial problems for you

There final point to cover is what to do if your customers are relatively good payers – meaning that they pay within terms – but you still have cash flow problems. This scenario is common for small and growing businesses.

One alternative is to use business financing to complement your existing resources. While there are many financial products that can help with this situation, factoring financing has been gaining traction as a solution to this problem.

Factoring financing accelerates the revenues owed to you from slow-paying (but good) customers, providing needed liquidity to your company. Unlike other products, factoring financing is relatively easy to get and can be very flexible.

Get more information

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.