As a small business, you rely on your customers to pay on time and in full to keep operations running smoothly. Unfortunately, no matter how well you run your business, you will face late payments and overdue accounts from your customers – 64% of businesses say they are routinely paid late.
Overdue payments are a significant issue for small businesses. In addition to causing frustration and wasted time, they disrupt cash flow, distract from other priorities, and endanger your business’s financial future. As a result, some small businesses may be unable to take on new customers, meet operational expenses, and pay employees, vendors and suppliers.
How can you prevent overdue payments? Here are some strategies you can implement to help your customers pay on time and to keep your business running smoothly:
- Perform Credit and Background Checks on Potential Customers
Run credit and background checks on potential customers to determine their trustworthiness and reliability. The checks provide essential information about your prospect, including:
- Identification verification
- Bankruptcies
- Credit Inquiries
- Criminal records
If you don’t want to pay for a credit check, you can also check references who previously worked with your prospective customer.
- Have a Legally Binding Contract in Place
Put all details in writing before starting work, whether it's a new customer or one you’ve known for 20 years. Both you and your customer must sign the contract. Ensure contracts include:
- Essential dates (e.g., contract creation, expiration, singing of contract, expected delivery of goods or services)
- Contact information for you and the customer
- Payment methods and due dates
- Late payment terms
- Contract termination terms
- State Payment Terms on Invoice
Display payment terms – deadlines, fees and late payment penalties – prominently on the invoice. All invoices should contain:
- Payment schedule
- Terms
- Preferred payment method
- Scope
- Deadline
- Late payment policy
Use specific calendar dates rather than “due upon receipt” or “due within 30 days of the invoice date.” Giving them a target date increases the chances they’ll pay on time.
- Automate Invoice Management
Manual invoicing via email or mail is slow and inefficient – invoices may get lost in the mail or buried in an inbox. Investing in an invoicing platform simplifies the process and allows you to set up email reminders for invoices and overdue payments. You can also set up automatic payments with your regular customers.
- Offer More Payment Options
While you may have a preferred payment method, giving customers more options helps you get paid faster. Some customers prefer to pay by credit card, eCheck, or direct ACH bank transfer. Consider enabling digital payments through apps such as PayPal, Bill.com, CashApp, Venmo, Google Pay, and Apple Pay.
- Offer Discounts for Early Payment
Incentivize your customers to pay early by offering a discount as a percentage of the total invoice amount. For example, you could offer a 2% discount if customers pay your invoice within ten days of receipt.
- Invoice Promptly
Don’t wait until the end of the month to send invoices to customers. Instead, submit invoices as soon as a project is complete. Then, the work will be fresh in your customer’s mind and the invoice less likely to be ignored.
- Request a Deposit
Ask the customer for partial payment upfront and invoice for the remainder of the payment when work is complete.
- Charge a Late Fee or Penalty
Establishing late fees can motivate customers to pay before the due date rather than incur a penalty. You can charge a flat fee (i.e., $25 for payments up to five days late) or a percentage of the payment amount (i.e., 10% for every week the invoice remains unpaid past the due date, 5% for payments made five days after the due date and 7.5% after that). Communicate late fees to your customer upfront to set expectations and include them in the contract and on all invoices.
- Confirm Receipt
Contact the customer a few days after sending the invoice to confirm they received it. You are not only providing a reminder but also eliminating one excuse to delay payment. They can’t claim they didn’t receive it.
- Verify invoice information
During the contract phase, confirm if the customer requires specific data points on the invoice or if it needs to be formatted a certain way. Also, ensure you send the invoice to the right person. While you may have a specific contact within a company, they may not be the person who approves the payment of invoices, so confirm who needs to receive the invoice.
- Set Shorter Payment Terms
It’s easy to forget payment if the bill is due in 60, 45, or even 30 days. Instead, establish the payment deadline at 15 or 20 days.
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