Whether you own a small business or manage a large company, getting your invoices paid promptly is an essential part of managing your cash flow. Awkward moments arise when customers are late with payments. It can be terribly uncomfortable having to ask a client for an immediate payment, adding on late charges, or delaying service to that customer.
To avoid conflict, there are a variety of ways that you can motivate customers to make any due payments in a timely fashion.
Request a Deposit or for a Client to Pay Upfront
This type of request is often a given when dealing with large projects or orders, especially if you are not only offering services but must supply materials to get a job started. Many customers will have no difficulty with leaving a 50% deposit and paying the remaining 50% upon completion as this is a sign of good faith on both your parts. This practice not only aids with your business cash flow but gets clients in the habit of at least partially paying before the work is completed.
Agree to Payment Terms Before Beginning Work
Business agreements should be written and signed. Estimates should be thorough and agreed upon in full before beginning work. Disputed charges or disagreements will generally delay payments. Any agreement should clearly state payment deadlines and terms.
The terms should also include fees, eventual late fees, and contract essentials. When sending invoices, include references to agreement terms such as “due upon receipt” or “payment due within 7 business days” as well as a referral to an agreed upon estimate.
Send Your Invoices Immediately
The same day you complete a project, your invoice should be sent. This is a strong psychological aid because the completed work and payment due are linked. Many customers will automatically pay right away. Invoices need to describe products or work in detail including delivery or work dates.
Always make it a point to be polite when sending bills. Thank clients for their business or for prompt payments. Customers appreciate courtesy.
Set Up a Retainer or Payment Schedule
If your customer has signed on for long term services from you, establish a retainer payment at set intervals. This helps you with cash flow, your client with budgeting, and results in faster payment. An alternative is to establish a payment schedule. If you agree to payments on the 15th and 30th of every month, make sure that your invoices arrive like clockwork on those dates. A joint agreement on a payment schedule is very effective in ensuring you get paid.
Consider Offering a Discount
Offering a small discount, especially for long term or repeat clients can add up to savings for customers. A 2% to 3% discount for early payment may prove to be an adequate incentive to get those invoices not only paid promptly but paid early.
Add Late Fees
Adding on a 2% or higher late fee for invoices not paid within a certain number of business days can also be a strong incentive for customers to pay on time. Late fees should be clearly stated in agreed upon payment terms.
Send Payment Reminders
If you send an invoice allowing 10 business days for payment, it is a good idea to send a reminder several days before as well as on the morning of the due date. This will aid clients that may have misplaced or set aside an invoice.
Offer More Than One Type of Payment Possibility
Depending on the client, some may prefer to pay you with a check, by using a credit card, direct deposit, or a bank transfer. The more payment options you allow, the fewer reasons there are for not paying promptly. Discuss this with your company’s financial institution to give customers as many payment options as possible.
Maintain Good Communications and a Good Business Rapport with Clients
If there is one thing that the Covid pandemic reminded everyone, it’s that even the best of businesses or customers can fall on hard times. This means a customer who normally pays promptly may experience an unforeseen hardship and find him or herself unable to maintain prompt payments. Maintaining a good business relationship with open communication will enable you and your client to deal with momentary difficulties and find a solution that is amenable to you both.
Avoid the Wavering of or Flexibility of Payment Terms
When someone is too flexible, this can open the path to repeated late payments. A one-time grace period is acceptable upon evaluation of any given situation. A second grace period sends a message that it’s okay to not pay promptly. You may need to politely remind your client that invoices need to be paid by their due date.
Be Open to Renegotiating the Agreed Upon Terms of Payment
Your client may be facing a rough patch through no fault of his own. You won’t want to lose a client because of an unpaid invoice. Discuss the situation with the client and agree upon new payment terms even for a limited period that work for both of you.
Reward Clients that Are Prompt with Payments
Handwritten thank you notes or personal telephone calls expressing appreciation go a long way in reinforcing shared success. You can also make it a habit to send a small gift such as a company gadget every quarter or semester to clients that pay invoices promptly. It’s a nice way to let customers know you appreciate their business.
Leverage Your Services or Products if Necessary
If you have a client who is consistently late in making payments, consider withholding your services or products from them until you receive the payment due. You can also politely refuse to supply new orders or do other work for them until paid or new payment terms have been established and respected.
Keep Track of Invoices and Payments Weekly
Getting paid and managing your cash flow depends a lot on your keeping a vigilant eye on the situation. This will allow you firsthand knowledge of who is paying and who is not. With unpaying clients, you’ll be able to intervene rapidly as opposed to allowing a situation to fester.
Consider Automating Invoices
Automating invoicing gets invoices to clients quicker than basically any other method. Automation software will also usually include payment reminders and be linked to payment option systems. This means less work for you, and you’ll be able to consult updated invoice payments at any time.
Consider Cloud-Based Invoice Management
In the event you need to revise an invoice to get paid, or resend an invoice because misplaced, cloud-based solutions allow you to manage invoicing remotely from anywhere. This is ideal if you want to maintain a payment schedule and not lose days because you must revise or reissue your invoices.
What to Do If a Client Doesn’t Pay
If your client does not pay your invoice promptly, don’t automatically assume the worst. Invoices can be lost, misplaced, or have been sent to the wrong office. Perhaps the person assigned with paying is on vacation or sick leave. Companies may take their time in paying if they are having a momentary cash flow problem. Here are several strategies to get your invoices paid.
1. Send a Written Reminder if the Due Date Has Passed
Begin with a written reminder. If there’s been a mishap, this will probably suffice. While you are not obliged to concede more time, you may want to set a new due date within a week or so to allow a customer, especially in the case of a company, to process payment.
2. Send a Letter of Debt Collection
This is not a reminder but a formal notice. Debt collection letters will include the date that the payment was due, a new due date, payment methods, and that you will take action if payment is not received within the new due date.
Actions may include using a debt collection agency or initiating legal action. This will depend on your rapport with the client.
3. Initiate Personal Contact with the Client
If your client does not respond to your reminder or to a debt collection letter, try calling your client to discuss the problem and renegotiate payment terms. In the event of a company, contact the purchasing office or accounts payable office, or your direct contact for the services or products you provided. If you are unable to make progress, follow up the company’s chain of command right to the top.
You will need to evaluate the motives that you are not being paid promptly to determine how to resolve the situation. You may want to negotiate a new payment plan with a partial payment rather than initiating legal action.
4. Send a Final Written Letter
In this case, it’s best to get an attorney. If your client still continues to not pay, send a final written notice requesting payment. A final letter resembles a debt collection letter but states that you will sue if not paid. You can write the letter yourself, but a letter from your attorney may solicit more attention. In terms of cost, a letter from an attorney will cost you less than a lawsuit. You also are not required to use the same attorney should you decide to sue.
When pursuing payments, it’s important to be persistent and to follow up. If the debt is small, it may be easier to collect or can be presented in small claims court legally. Larger debts may be harder to collect and eventual late fees will only complicate the situation.
Although you should remain professional and polite, you should also interrupt working or supplying this client if they continue to miss payments. Sometimes this will be sufficient to get a payment issued.
In the end if a customer does not pay, you will have to choose between a debt collection agency and a lawsuit. If the customer has disappeared, it’s most likely you’ll take the loss. If your client has filed for bankruptcy, you can file a claim with the bankruptcy court.
If you are supplying goods to a customer that does not pay, the Internal Revenue Service may allow you to write off the debt on your tax returns. Unfortunately, this is not the case for those furnishing services.