If there’s one thing all business owners can agree on, it’s wanting their customers to pay promptly. On-time payments help keep a business running smoothly; timely payments ensure you can keep the lights on, make investments in growth, and pay yourself a salary.
Late payments, on the other hand, don’t just create gaps in cash flow, they also add to your operational headaches, taking mental energy away from more important tasks. Unfortunately, the problem is all too common; the average small business is waiting for about $5,000 in overdue payments every month.
What can you do to get clients to pay faster? And how do you make the process of getting overdue payments from clients less stressful? Follow the advice below to help shorten the time between invoicing and payment.
1. Invoice promptly.
Invoicing as soon as possible sets an example for your client to follow when paying you. A late invoice tells customers you may not be that concerned with getting paid promptly. Therefore, always invoice as soon as the products or services are received, which is when your customer will be expecting an invoice and paying will be top of mind. Remember that your clients can’t pay an invoice they haven’t seen. Make sure customers have received invoices by requesting confirmation of receipt and following up if you don’t hear from them. Using an online tool to invoice, as opposed to a paper and mail system, will allow you to track invoice payment automatically and follow up easily.
2. Avoid disputes with estimates.
If your client disagrees with your invoice or disputes charges, that will cause a delay in payment, not to mention putting you in an awkward situation that may damage the client relationship. Reduce that possibility by submitting a thorough estimate before you begin a project or ship products. The estimates should contain the same information your invoices do, including prices, deadlines, and payment terms. If you can get those numbers into customers’ heads, they won’t be unprepared when they see your invoice.
3. Leave nothing to doubt.
Making sure the date and your payment terms are at the top of every invoice, where they can’t be missed, will also help ensure clients pay on time. In the body of your invoice, anticipate customer questions by describing products and services in as much detail as possible, including dates that work was performed or delivered. Make sure your invoices check all the boxes for best practices by reviewing our recent article on invoicing.
4. Create clear and consistent payment terms.
It’s essential to state crystal-clear payment terms in your invoices, including the time frame in which you expect payment. The payment terms provide a starting point for any follow-up conversations and will set the stage if you need to discuss charging late fees or interest. Thirty days is a typical time frame for payment in many industries, although in our current era of digital payments, customers should be able to pay you more quickly if you use an online credit card payment option; for the most part, gone are the days when clients need to wait for accounting to cut checks.
If you plan to charge interest on late payments, you should state this clearly in your payment terms. Be sure to point out the date from which interest will begin accruing. The additional cost of being behind on payment may have a large enough impact on your client’s bottom line to motivate a speedy turnaround.
5. Get creative with payment terms.
While it doesn’t completely eliminate the problem of outstanding invoices, one of the best ways to get clients to pay faster — and smooth out cash flow — is to require payment of a portion of the full amount up front, as a deposit, with the remainder due upon delivery. This might seem like a big ask at first, but it’s actually an equitable arrangement that can help keep client relationships strong over the long term. Another option is to require payment when certain project milestones are reached, such as delivery of part of the project or order, or when certain expenses are incurred.
You can also try another more obvious enticement: Offer a discount for “early” payment, such as payments within one week or before 30 days. Be careful not to discount the invoice too much, though: a 2% to 4% discount should be enough to get customers’ attention without raising their expectations for discounts elsewhere.
6. Offer multiple ways to pay.
Take a page from online commerce businesses: Accept credit card payments and digital payments as well as checks. It’s easier than ever to set up your business to take credit cards and bank cards. Payment technology is changing fast, with new products and automatic payment methods becoming more common. You’ll increase your chances of prompt payment if you accept as many of these methods as possible. If your clients are large organizations, you may find that they make all their payments via direct deposits, or ACH (automated clearing house).
7. Follow a consistent process for follow-up.
Use your payment terms to determine when to take the first step on an unpaid invoice. Consider sending a brief payment reminder email or make a phone call that’s friendly in tone but sticks to the point. If you use payments or accounting software, take advantage of features to automate the payment reminder process. This can be a big time-saver, and effective in gently prodding clients for upcoming payments before it becomes a bigger issue. If that doesn’t work a phone call might be necessary; a direct conversation can get questions answered quickly, plus speaking with your client can be helpful for building your relationship.
Should payment problems persist for several months, remember the saying about the squeaky wheel getting the grease. Set a schedule for subsequent communications – additional calls, emails, or resending the invoices – and stick with it.
8. Leverage your products and services when necessary.
You need your client’s payments, but they probably need your continued work just as much. If you do ongoing work for a client who’s consistently falling behind on payments, be ready to withhold completed work or products – or politely refuse to do new work – until payment is received, or a payment plan is established. Setting this expectation up front, along with the payment terms and expectations, will ensure it doesn’t come as a surprise.
9. Know when to hire a collection agency.
If you’ve spent months and months sending payment reminders with no result, it might be time to give up and hire a collection agency. Do your homework before taking this step, and know that the agency will take a big cut out of your invoice – perhaps 30% or more. Keep in mind that if you go the collections route, you will likely bring an end to the client relationship, but it may be a necessary step if there’s no other way to get paid.
10. Manage your client relationship.
Keeping customer relationships healthy and cordial is one of the trickiest parts of dealing with unpaid invoices. If the relationship is an important or longstanding one, will pushing back on overdue payments damage your ability to get more business? Use your instincts to decide how hard to push back – but at all times keep things professional and friendly. If you can get the client to feel not just that they have to pay, but that they want to, you may see payment faster.
If customers are unable to meet your payment terms today, remember that they could still be potential customers in the future. Often, an invitation to return when they’re truly ready to get started will effectively keep them in your sales pipeline. Whether that happens three months from now or three years from now, they’ll remember the positive business experience they had with you and are likely to return.
Some payment situations are an opportunity to show discretion, and maybe a little empathy. If you work with a client to pay over time or find some other way to make it easier for them to pay, they may feel that you’re not just a vendor, but a partner. This will inspire loyalty and strengthen the relationship, making your business stronger and more successful over time.