What to do when your customers don’t pay on time

Check credit and confirm payment terms in advance.

Use services like Dun & Bradstreet and Experian to do credit checks on new customers and separately establish credit limits and maximum order amounts so you can avoid exposure to risk. Make sure that your new customers fill out credit applications and that you verify all the information. Also regularly update the credit information for existing customers. Some people may find this awkward, but it’s a critical step that can minimize bad debts, particularly with new customers.

“It all comes down to getting as much detailed information as possible for the companies that you don’t know that want to do business with you,” said Torban, who also advises his clients to use the credit application process as a way to confirm payment terms.

“You need be very clear about payment terms right up front,” he said. “You need to tell the customer that this is the product or service we’re providing to you and this is the time frame for payment.”

The faster you get your invoices out, the faster you should get paid. Don’t wait until the end of the month. Bill as products are shipped and services are performed.

My company requires our clients to pay in advance by purchasing blocks of time. When the block is used up, we provide an accounting to the client and agree on a new block. That way we’re never putting money out of our own pocket. It’s not easy for some, but many smart business managers I know in law firms, construction companies and contractors charge in advance for their work through retainers or deposits. Getting cash in the bank helps to minimize the cost of a potential collection issue in the future.

We all know that credit card fees can be steep, but there is value in paying that fee so that you collect your payments at the time of the transaction. Some of my clients insist on taking payment from their new customers with a credit card and even charge a processing fee.

Many of my clients use their customer relationship management systems to schedule follow-up calls and reminders for certain customers and to setup alerts and workflows to remind in advance when invoices are coming due. Others leverage credit collection systems like Growfin and Versapay, which, depending on your company’s invoice volume, can help manage collections with more automated tracking and collaboration.

“You can use software to establish a process,” Ferguson-Deberghes said. “You can make sure that process includes making calls and sending e-mails as needed, all depending on the comfort level you have with your client.”

Torban agrees. “Being proactive is important, and good communication during the collections process is key,” Torban said. “Even getting on the phone and hearing their story is a good way to understand what’s going on to figure out a way to work things out.”

Staying on top of your receivables is critical so make sure you’re getting frequent reports listing overdue invoices, average days outstanding (for all invoices and for individual customers), and comparing accounts receivable as a percentage of sales.

I’m sure that, like my business, the great majority of your customers pay on time. So it’s important to spend the time monitoring those that routinely fall behind.