Most small business owners dislike the thought of calling customers and demanding payment, especially when you’re trying to build sales. It’s a balance of needing to be paid, and not antagonizing the customer. To avoid this, get your credit management system set up as soon as you can, and you’ll reduce the risk of late or non-payers.
When you’ve got to run credit checks
You know the old saying – prevention’s better than a cure. You can reduce the risk of chasing up an unreliable customer by doing some simple checks in the first place. The first thing you need to do is gain permission for a credit check, and then follow through on it.
Beyond credit check results, other signs of a potentially tricky customer could include:
- Unusual large orders that follow a smaller order – exercise caution when fulfilling large orders for a new customer. It’s not unknown for a small order to be paid for on time, and then the next order which is much larger isn’t
- One big customer – it’s safer to have a number of smaller customers instead of one large one, as the impact of one smaller business paying late is spread over your whole business
- First time customers–customers who’ve been blacklisted by other businesses may target you as their next unpaid victim
- Friends and family – it’s hard when people you know want to buy on credit, when there is a risk they will pay late.
Even if you’re confident that a debtor will ultimately pay up, outstanding balances are a burden that your business should not be forced to carry.
Speeding up the cash cycle
Your cash cycle is the time it takes you to receive payment for your product or service. The shorter your cash cycle, the faster cash comes into your business. Some businesses are easy: when you buy a coffee, the café receives the cash immediately. Some industries are harder; if you are contracting you often have to comply with procurement rules, which can have more complicated payment processes.
To speed up the flow of cash you can:
- Switch to cash payments or use shorter credit terms
- Offer your customers mobile and online payment options. If you’ve just finished a job, delivered a product or completed a service, ask for payment immediately while they are happy
- If you do invoice, ask for payment in seven days. If you do offer payment the following month, remove any reference to 30, 60, or 90 days overdue. You should just have two amounts, due now and overdue. Don’t let people think they can fill in the boxes to 90 days late
- Incentivize early payment with discounts or free products and services
- Ask for pre-payments or deposits.
Know exactly how much you’re owed day to day as customer overdue balances can sneak up quickly, becoming difficult for both the customer and you to manage. Know exactly how much you’re owed.
Accounting software will help you find out exactly how much customers owe your business at all times.
Along with customer details, you can often set up your invoicing system so that:
- Automated reminders let you know when a customer is late, so you don’t forget
- You can keep track of customers’ payment histories, giving you more to go on when you are thinking about changing their credit terms
- You are not at risk of extending them extra credit when they still owe you money
- You can take fast action if you need to.
Talk to your accountant about the best software for your business. Ideally, it will be one that’s compatible with the systems they use.
You can also use specific software apps that will help you keep on top of debtors and send reminders.
Clarify your terms of trade
Set up your own terms of trade and double-check they are clear. If your trade terms are confusing or if they open up the possibility of late payments, consider firming them up.
If you don’t have terms, now’s the time to spell them out. For example:
- Outline when payment is due
- Document any late payment fees and how they are calculated
- Define any incentives for early payment.
Set credit limits
Credit limits are designed to prevent debt from escalating out of control. First, put a credit limit on all customer accounts and then put an automatic ‘stop credit’ on any overdue accounts.
It’s also sensible to train your staff in how to approach a customer who has reached their credit limit so that the account can be settled in an efficient and professional manner.
You could also set up automatic reminders to gently notify customers reaching their credit limits.
Many customers, especially those who have multiple employees placing orders, will appreciate these reminders as they may be unaware of how much has been purchased.
Always require a credit application
Many businesses expect other businesses to extend credit. That said, not all businesses are creditworthy, which is why you should require a credit application – and then run a credit check which helps you better identify good and bad credit risks as well as prioritize collections.
Be consistent and measure your debt collection success
Always take action in the same manner regardless of which customer is overdue. Having a defined process and following it consistently is crucial. If you’re having difficulties with a particular customer, aim to resolve issues early because the sooner you chase the debt, the faster you’ll get paid.
If you don’t already, set up multiple payment options as customers often pay faster if allowed to do so by direct credit or internet banking. Set up mobile payment options so customers can pay you immediately after a job has been completed and go over your credit agreements and clarify your terms of trade to reduce the chance of late payers in the first place.