Best practices to protect your business from late payments
Here are some things you can do to improve your business credit practices.
Contract or agreement
Doing business with a new client on the basis of informal agreement can be tricky. Your client can end the business terms upon failure of payment without any legal repercussions.
A contract on the other hand contains clauses and terms about late payment and other mandatory aspects. A contract is enforceable by a court as both parties agree to the terms when signing to avoid future complications and invoice disputes.
Implement aging method and customer rating system
An ageing data lists customer’s unpaid/late invoices by date into four or more columns. It greatly helps with keeping track and chasing payments according to the preference in the table.
- Column 1 lists undue invoice amounts
- Column 2 lists 1 to 30 days invoices that are past the due date
- Column 3 lists 31 to 60 days past due date invoices
- Column 4 lists more than 60 days past due date invoice amounts
You can also rate customers on the basis of timely payments for effective monitoring.
- Assign A for those customers who always pay the invoice before the due date.
- Assign B for customers who usually pay invoice around the due date and require minimal payment chasing.
- Assign C for clients who regularly cross the due date barrier but pay after credit line adjustments.
- Assign D for customers who need prompt chasing and monitoring. The resources you use to recover payment add to overhead costs.
- Assign E to those debtors whom you like to offer services or products with advance payment terms and zero credit.
Improve your in-house invoicing practices by signing up for autopay
It is beneficial to start the invoicing process upon the delivery of goods or services.
Some businesses send batch invoices on a particular day of the week. That adds up to 5 days to the recovery cycle without any purpose.
It can be harmful to the cash flow because you will be adding days unnecessarily.
Although you’ll get the payment for it, the process of getting your payment back starts after the invoice. So, if you are 15 days late for invoicing, it’s 15 days more to get the payment.
Prominently feature terms and due date on the invoice
Do not leave any margin of error when mentioning the due date and terms related to it. Speak to the accounting department about the terms and implications if the customer is habitually paying late.
Use electronic invoicing systems
Invoices through email are not only cost-effective but also cut down stationary costs as well. It further ensures on-time invoice delivery and also offers a source of documented proof.
Introduce various payment options and instalment plans
Offering only a single payment method through cheque allows customers to give excuses for late payments. Losing a cheque in the mail or having to bear the cheque clearing process can cost a little time. Make better use of today’s possibilities offered by internet banking.
Utilize credit and debit card, direct debit, bank to bank transfer and standing order payment options with modified instalment plans to manage your cash flows.
The instalment plans also make it easy for your customers to pay within the due date and to manage their own cash flows as well to avoid late payments.
Track your invoices
A lot of times, you only interact with the sales and marketing staff to get their business. It is necessary to know where your invoices end up after the services or goods delivery.
Getting to know the right person helps in tracking down your invoice and the reason for the hold-up. This will speed things up for sure.
Nurture the right relationship
Being rude or losing composure while communicating with the customer when chasing late payments does absolutely nothing good for your case. However, polite behaviour with a firm stance works most of the time.
From the start of the business to the end, if the customer is willing to pay, don’t give the impression of an escalation in matters from your side with an abusive attitude. Of course, it is your money and late payment is a curse, but a polite voice can do wonders over an angry tone. This will help you get in their good books for future communications.
Send reminders before due date
Waiting with hopes of getting the payments without reminding your customer does not work every time. If the payment is already near the due date, remind your customers by emails and/or automatic software that the due date is near.
This simple practice often saves your business loads of time and overhead costs. Be polite and attach an invoice copy with a reminder email and mention a person’s name from your office as a point of contact in case of any issue. Also, offer the customer the option to pay via your accepted payment methods for their ease.
Keep proof of goods and services
Whenever you deliver goods or perform any services, make sure you have undeniable proof that the customer has received the goods, or the services are up to the standards when completed.
Secondly, the communication emails between you and the customer are also strong proof if an issue arises on the terms when the amount is due. Keep all the records safe and secure.
Train your team
Your SME’s sales team is the backbone of the profits it makes. Training them in a way to do business with only those customers whose credit ratings, debt payments and customer service are to ensure growth for your SME.
Your team should be capable of researching first about the company or customers rather than shooting in the dark for meeting sales targets.