Tips for Collecting Your Money faster
Debt collection can be problematic for some businesses to face. It’s about striking a balance of needing to be paid and keeping customers happy. Recovering the money owed by your customers who pay late, or not all, is a challenge that requires a systematic approach and careful judgment.
Credit Checks
You can reduce the risk of chasing up an overdue customer by implementing compulsory credit checks before you offer credit.
Beyond credit check results, other hard-to-collect money can be:
- One large customer you rely on. This can be especially difficult if they are the main source of income. It can be safer to have several smaller customers, as the impact of one paying late is spread over your whole business.
- 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.
Speed Up the Cash Cycle
This 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.
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.
- Incentivize early payment with discounts or free products and services.
- Ask for pre-payments or deposits.
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.
Manage Credit
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.
Accounting software will help find out exactly how much customers owe your business. Along with customer details, you can set up your invoicing system so that:
- You have automated reminders to let you know when a customer is late.
- Customers’ payment histories are tracked, giving you more to go on when you are thinking about changing their credit terms.
- Extending them extra credit when they still owe you money is not an option.
- 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.
Clarify Terms of Trade
Set these up yourself 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:
- Outline when payment is due.
- Document any late payment fees and how they are calculated.
- Define any incentives for early payment.
Clear and well-defined terms of trade help prevent misunderstandings, ensure timely payments, and create a smoother financial relationship with your customers.
Set Credit Limits
These 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.
You should 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 notify customers reaching their credit limits.
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
Always act 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.
Contact Your Customer
Once you’ve resolved any barriers to payment, if the debt is still overdue, get in touch. Start with a polite reminder or enquiry about the bill, as overdue payment may not be any fault of the customer, and then follow up as necessary.
Try one or more of the following:
- Personal visit – A face-to-face encounter can often solve the issue or ensure you get priority treatment. It’s also an opportunity to negotiate payment solutions. Perhaps the customer can pay by credit card instead of cash, or pay by agreed installments, with the clear written understanding that no partial payment will be regarded as full or final settlement.
- Call your customer if it’s too difficult to visit.
- Email a reminder.
A single visit, call, or email may be fruitless, but persistent follow-ups may very well do the trick, once the customer realizes you aren’t going to give up easily.
Employ Debt Collectors
If all else fails, consider debt collection agencies or a lawyer. Notify your customer one last time to let them know you plan to pass the matter over to a lawyer or debt collector.
Once you hand the debt over, there’s a strong possibility that the customer will realize you’re serious about chasing the debt. They’ll often pay up right away – in full or in agreed installments. A letter from a lawyer or agency can be enough to do the trick.
Next Steps
- Set up multiple payment options as customers often pay faster if allowed to do so by direct credit or internet banking.
- Offer mobile payment options so customers can pay you immediately after a job has been completed.
- Clarify your terms of trade to reduce the chance of late payers occurring.
Seek professional advice if late paying customers are impacting your cash flow and causing undue stress.
Diamond’s Business Services
If you have any questions regarding your business or getting started, Diamond’s Business Services team is here to help. Contact them to get started.