How to Handle a Slow-Paying Client and Improve Cash Flow

Working with slow-paying clients can be challenging. Slow payments can hurt your cash flow, impact your business, and – if you don’t manage them correctly – drive you out of business.

However, not all slow-paying clients are the same. They are usually divided into two categories:

Type 1: Slow but reliable. These clients are usually large companies who have great credit but insist on paying invoices on net-30 to net-60 day terms. They are often excellent clients, so you have to give them trade credit if you want to work with them, but their slow payments can hurt your cash flow.

Type 2: Slow and unreliable. These clients are difficult to categorize. They can be small or large companies, but they often pay beyond terms. They may tell you that they will pay in 30 days, but they will take 60 or even 90 days to pay. Sometimes they never pay and become collections problems.

While both types of clients can be hard to work with, there are ways to handle the cash flow shortages created by Type 1 clients. With Type 2 clients, however, you should either demand that they pay in advance, or you should avoid them if possible.

How to tell them apart before they become clients?

As a business owner or manager, you want to identify Type 1 and Type 2 clients before they actually become clients. The easiest way to accomplish that is to check their commercial credit rating and payment history through a commercial credit bureau. Both D&B and Experian offer high-quality commercial credit reports that can be used to determine the creditworthiness of commercial customers. These reports provide you with important information such as:

  • Current payment trends
  • Past payment track record
  • Legal issues
  • Prior bankruptcies
  • Suggested credit line (on some reports)

How to deal with Type 1 clients: slow but reliable

Clients who pay slowly, but reliably, are not bad. However, you need to plan for their slow payments to avoid a cash flow shortage. One strategy is to start building a cash reserve to cover business expenses while you wait for payment. It’s a simple strategy that works well but has one significant drawback: it can limit your growth because growth depends on the size of your reserve.

If your company is growing, you may be better off implementing a factoring financing solution. This type of funding is designed specifically to work with slow-paying clients. A factoring company finances your invoices from these clients and provides you with immediate working capital, while the finance company waits for your clients to pay. The transaction concludes when your customer pays on their usual schedule.

The factoring transaction typically has three steps:

  1. You invoice your client
  2. The finance company provides you with funds, using your invoice as collateral
  3. Your customer pays 30 to 60 days later and the transaction concludes

Financing invoices allows you to offer net-30 payment terms to clients without having cash flow shortages, and it enables you to grow your business by leveraging your biggest asset – solid invoices from reliable clients.

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