A Practical Guide to Collecting Money from Late Paying Customers

An unfortunate experience for most entrepreneurs or small businesses, is late paying customers. Late payments are frustrating. They disrupt cash flow; they take up valuable resources seeking payment and can hinder the operation of a business. Throughout my time as a business coach, I can’t think of many clients with a credit sales-based business who has not experienced this. So, what can you do about it? Well, there are multiple professional strategies you can take to minimize or eliminate this problem. These steps can be implemented into your business whether it is a new or developed business so begin today!

Steps to Reduce Bad Debts

Payment Terms & Conditions

If you look at late payments as a bit of a habit, prevention is better than cure. By having clearly stated payment policies, you can outline your payment requirements from the start. You should clearly communicate your payment expectations, the dates payment is due and any applicable late fees or penalties. Late fees and penalties are highly recommended. The chance or incurring additional debt is a big motivator to pay on time. Clearly stated payments terms provides you with an easy reference for the customer should any debate arise.

Even if you have an established company who has been trading for a long time, there is nothing preventing you from introducing new payments terms.

Professional & Prompt Communication

As with any communication in business, you should ensure your message is prompt and professional. Prompt means you should have an established time to send a communication and remain consistent e.g. the day after the payment is due. If the first communication has not had the effect, you should have another communication ready to go at the next time point e.g. one week later, and further communications repeated after this.

Your communication must remain professional, be courteous and make it feel like a gentle nudge. Avoid confrontational communication except for in the extreme case and a last resort. Remember, sometimes people will not get your communication so ensure they are receiving it before escalating.

Non-paying Debtors

Difficult debtors are often customers that are having financial trouble. It is often the case that you are not at the top of their list of priorities of bills to pay. They may be simply trying to stay in business. The reality is, if they go out of business, you won’t get paid. In this case, you should consider offering a flexible payment plan. If they can pay you a small amount of money regularly and still keep their business, you can still get your bill settled, albeit over a longer period but it is still better than a total loss. In such cases, it is beneficial to talk to your debtor and see what arrangement you can come to. Not only will you get payment, but you will build goodwill among you and the debtor, possibly leading to better business if the customer’s business recovers.

Dismissive Debtors

Yes, there are debtors who simple decide they aren’t going to pay you as they may think there is no consequences for them. If you have exhausted your communications and it is clear they are simply refusing to pay, you should begin sending formal demand letters. In demand letters, you should provide the amount due, when it was due, highlight any clear actions showing refusal to pay and that you will be pursuing further action. Sometimes the words legal action is enough to stir up some fear that it can result in payment. If these demand letters do not do the trick, you move on to Debt Collection agencies.

Debt collection agencies

Reputable debt collection agencies are specialist companies who have techniques proven successful in collecting unpaid debt. They also have the legal and procedural aspects in place to move to legal action. Debt collection agencies charge a fee or commission and although you won’t get the full amount of your unpaid debt, your chances of receiving anything using debt collectors increases significantly.

Legal Action

As a last resort, you can consider legal action against a non-paying customer. With legal action comes stress, time and resources, plus, possibly the cost of attorneys. Keep in mind that this can also become negative publicity if it becomes publicly known. However, this method is also the most likely method of recovering your debt. It may just be worth it.

Conclusion

Collecting debts from late paying customers is a critical aspect of maintaining a healthy cash flow in a business. By establishing clear payment policies and methods, you should be able to minimize or eliminate bad debts and receive payments in a timely manner. Not only will this ensure the survival of your business, you will also have a reliable financial structure to plan with. Through the use of consistent invoicing, professional and courteous communication and encouragement of timely payments, you can eliminate time spent chasing debts and get on with the important things.

If you need help establishing payment terms/policies or need help managing finances for your business, contact business coach David D’ Silva today.