By Barbara Davidson
Your business will most likely have to deal with late payments from select clients at some point. It could be quite distressing to be paid past the due date, especially for start-ups and entrepreneurs who own small-to-medium sized (SMEs) businesses.
Compared to more prominent organizations, SMEs rely quite heavily on paying customers to keep cash flow at an optimal range. Regular cash flow allows them to thrive and continue operating smoothly. Here are five techniques that you can adapt in your company to prevent delayed payments from your customers.
1.Due diligence is a must—research your clients from the get-go
Get to know your potential customers before jumping into the negotiation phase. It is your job to ensure that whoever you are trusting in business can adhere to the terms of your agreement accordingly—for instance, do you want the payment to be made once the service or product is already delivered, or do you prefer to issue invoices while waiting for clients to pay?
Finding out about your customers’ payment behaviors is vital, so you have a basis when deciding whether to take them in, to be more flexible with your policies, or to turn them away altogether. Learning about their financial performance from credit reports and research through interviews with relevant references will get you a better picture of their capacity to pay.
2. Make sure your payment terms are specific and on point
Before starting your business operations or taking on any new deals, review your payment policy. Ensure that your terms are easily understandable and not open to other interpretations so that your clients understand what they are getting into.
First of all, you should be able to define your standard payment terms easily. Indicate if it’s a 30-day deal or some other definite acceptable time frame. Be brief and succinct when it comes to wording your five, and weed out any unnecessary details.
It is never advisable to bombard your customers with too much information or use highly specialized industry jargon. Ensure that the copy of payment terms you send to your clients, information on the FAQs page of your website, or any marketing material you may have in circulation is consistent so that there is no room for future disputes. Spell out any late payment policies you have, too.
When sending invoices, make them understand in simple terms what they are being billed for, and veer away from general phrases such as “due in two weeks.” It is better to indicate a specific due date so that they can see at a glance exactly when payments should be made.
3. Entice them to pay up at the start of the deal by offering early payment discount
Get your clients to pay earlier by offering them incentives or early payment discounts. This could result in them paying their invoices way ahead of deadline.
For example, you can reward them with a small discount on their amount due if they pay within the first three days after their invoice has been issued, or slashing a specific amount—for instance, between 5% off on their next purchase or project with you. Dictate the terms as you see fit, ensuring that you still meet your target in the process.
Indicate as well that the offer expires once their balance is settled beyond the due date.
4. Request for an initial down payment to deposited once you start working with your clients
Aside from upfront payment, asking for a down payment is also a great way to improve cash flow. This tactic works particularly well for companies or individual freelancers that offer services spanning a certain amount of time. Requiring a down payment will also filter the type of clients that come to you for business. You can sift away those who do not intend to pay for your goods or services.
Down payments could range between 25% to 50% percent deposits. The remaining balance can be paid in full once the project has been completed. Be specific about the amount, percentages, and due dates in the contract, as well as the invoices, to avoid confusion.
5. Make multiple modes of payment and channels available, so it is easier for customers to settle their balance
Your business will benefit greatly from making payment methods accessible to your target market. Take advantage of technology by setting up online payment channels that are optimized for mobile use. Consider accepting checks, debit cards, and credit cards as well as modes of payment. Remember to consider online transaction fees when setting your prices.
Opening up multiple options that enable cashless payments for your customers will not only make payments faster and more convenient, but it could also open up more business opportunities for you. It’s also good to research which invoicing methods your customers prefer using so that you will have a decreased risk of receiving late payments.
Getting paid on time will allow your business to thrive
Having the ability to collect payment when it is due will impact the ease by which you run your company. Creating clear-cut policies laid out in an organized manner is the first step to making sure your clients understand what they are getting into.
Whenever you can, offer incentives for early payments, and penalize those who pay past the due date with a late fee. Doing so will convince customers that paying on time is the way to go. Making it easier for clients to settle their payments by having multiple payment channels available will allow them to get the task out of the way as quickly as possible so that you could get compensated faster, too.
In the event that late payments become inevitable for a customer in a difficult financial situation, you could be a bit more flexible and help them out by developing an installment plan. Doing this ensures that there will still be cash flowing into your reserves.