Sadie Keljikian, Top Billion Finance
Selling goods or services on open terms is a mixed bag. On one hand, open terms can attract more volume and bigger customers with the potential to accelerate your growth and increase revenues. On the other hand, allowing customers to pay later diminishes your cash flow and creates the risk of payment default.
Here are a few ways to protect yourself against delayed payments and handle tough customers:
Structure your payment terms carefully upfront.
The best way to avoid payment default is to carefully structure the terms of your relationship. You should perform credit checks on new customers before offering terms. If you can’t, at least ask for credit references to get an idea of that customer’s bill-paying habits. Use the information you gather to determine proper payment terms. For example, if a customer tends to pay late, you may want to take a deposit upfront, or include late payment terms or early payment discounts to offer incentive for timely payment. If a customer has a history of stiffing vendors and engaging in unethical practices, perhaps you should not offer payment terms at all and instead demand payment upon delivery or only deliver small quantities. Conversely, if a customer has good credit, you can offer terms and rest assured that they’ll pay.
As a recap, if you’re concerned about poor payment habits, include provisions in your customer’s contract indicating that you will charge interest on past-due invoices and update their payment terms if their payments are habitually late. If a customer is particularly problematic, require cash on delivery, or “COD”, rather than open terms. Follow through on these penalties diligently. Mistakes happen, but imposing and enforcing a financial penalty on late payments and controlling your customer’s access to open terms gives you more leverage to collect.
Invoice punctually and consistently.
When feasible, invoice your customer for each shipment. Some vendors choose to bundle multiple shipments and transactions into one invoice periodically (i.e. weekly or monthly) to avoid large quantities of small invoices. However, combining transactions can cause problems when you’re collecting.
One such problem arises if a customer doesn’t communicate or place a re-order after their initial purchase. Because they aren’t invoiced immediately, they may forget or be difficult to contact for collections. Unfortunately, customers will sometimes dispute charges that they may or may not remember, which will further slow up your processes and potentially cause legal difficulties.
For these reasons, it is good practice to consistently and immediately invoice your customers each time you fulfill a customer’s purchase order. Once the goods are delivered or the service is rendered, invoice your customer soon thereafter to ensure that your records are accurate and that you’re always paid.
Follow up regularly and without apologies.
Following up with customers on past-due bills is uncomfortable. There’s no denying it. However, if you are polite, professional, and follow up as a matter of course, collecting can be just a part of the process, rather than a cause for confrontation. Another way to avoid bad blood is to outsource your collections to companies like factors who specialize in collections. By having a third party collect your invoices, you can be the good guy while your factor or collections agency does the dirty work for you.
When managing your collections process yourself, you should automatically check in with your customers as soon as a payment becomes past due. Always approach the situation logically and professionally and be firm, but avoid a “bad cop” attitude. Mistakes happen and your customer may not be aware that their payment is past due or there may be other legitimate reasons why they haven’t paid yet.
Whether it’s you or a third party (e.g. factor) collecting your invoices, be ready to enforce the terms and press the issue without apology. Although you may feel like the bad guy, you are ultimately creating an environment in which you and your customer can build a healthy relationship. Enforcing obligations re-enforces expectations and even helps your customers avoid interest charges and bad credit.
Keep careful records of all interactions, invoices and amounts in question in case your customer is confused and/or attempts to dispute payment. For example, if your customer wants a proof of delivery, you should have it filed next to your invoice. Since it is their niche, professional third collectors and factors are particularly adept at keeping records at making sure documentation is in order.
Some customers are tricky. They may tell you there’s a check in the mail or that they’re sending it today, when in fact, they are perpetually late with payments and often lying. These kinds of customers require a particularly shrewd approach. If they are local to you, offer to send a courier to pick up payment rather than have the customer send it in the mail. If not, consider selling to them exclusively on COD terms or requiring them to pay you via credit card to avoid delays. Get creative. There’s no limit to how you can structure transactions, communicate with your customers, and otherwise effect collections.
Third Party Outsourcing.
As described above, using a third party to provide collections has many advantages. Collection agencies are resourceful when it comes to particularly slippery customers, but their services can be expensive. Many wholesalers prefer to use factoring, since the “bang for your buck” is more substantial. Factors typically buy invoices from you at 80% of their face value, collect from your customers, and then pay you the remainder of your invoices’ value, less factoring fees (typically 1-3% of the full amount). So, for a relatively low cost, you receive your funds immediately and your factor takes full responsibility for your collections process.
If you’re new to this, it may take you some time to find your own approach. Always remember to be friendly, but firm. As mentioned, these interactions can be uncomfortable, but you can make the best of it in how you choose to frame and approach it. The more you systemize your collections process, the easier future interactions will be for you and your customers.
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