Collecting unpaid invoices may well be one of the most tiresome tasks of operating a small business. The majority of small and midsize companies deal with collections a tad bit reluctantly. Almost everyone hates to do it. Consequently, it’s a job that is completed after everything else is done, or if you have to have money urgently.
This error is costly.
Collections ought to be viewed as one of the essential features in your company – second only to customer service. Spending some time collecting your unpaid invoices brings in the funds that your company is required to pay employees, suppliers, and all of its operating expenses. Without sound collections, unpaid invoices would undoubtedly accumulate, and you would definitely go out of business. It’s that easy.
Luckily, collections don’t have to be complicated or even cumbersome. It’s merely a matter of following the appropriate system. We intend to share a collections system that is straightforward to implement, simple, efficient, and extremely effective.
In this article, you will learn how to:
- Avoid bad-paying clients
- Do collections calls the right way
- Use a simple trick to reduce the number of disputes
- Improve cash flow
- Use financing to improve your cash flow
Tips on how to get paid on time
To summarize, the best solution to get paid promptly would be to work with clients who have a history of always paying on time. Add an excellent follow-up system, and you have a formula for valuable collections with little to no hassles.
What happens if a prospective client lacks a good payment track record ? You could work with them assuming that they pay ahead of time or upon delivery. Nevertheless, be careful not to give them net-30 days credit. Or else, you will notice those invoices rapidly turn into bad debt.
Step # 1: Examine your client’s payment history
Before offering any customer with net-30 payment conditions, look at their commercial credit. These types of reports will give you critical information about your client’s payment background with their other vendors.
If a customer has an excellent track record paying their vendors, there is undoubtedly an attractive possibility that they will pay you on time as well. Consequently, you should feel at ease offering them a certain amount of credit.
Commercial credit reports are reasonably affordable and can be purchased from organizations such as Ansonia, Dun & Bradstreet, and Experian. These reports are straightforward and usually provide a recommended credit line.
You could save your business a lot of hassles, reduce bad debts, and enhance cash flow just by checking the credit of all customers that ask for terms.
Step # 2: Make use of a beautifully written contract
Each sale that you make ought to be governed by a legal contract. It ought to be constructed by an attorney and should define all deliverables, time frames, how conflicts are handled, and all payment requirements.
Not making use of a contract is usually a significant mistake, mainly if you are providing payment terms. You will have absolutely nothing in writing that describes when payment is due . And you will have little recourse if you wish to pursue legal action.
Step # 3: Use a delivery acceptance letter
Just about the most effective ways to maximize your collections approach is by utilizing an acceptance letter – a basic letter that says the work which has been done or items that were delivered to the client’s pleasure. It ought to be signed by the customer once the work has been finished.
The acceptance letter will help you to recognize possible problems right during the time of delivery. If the customer is reluctant to sign the letter, apparently there is a problem. This step provides you with an opportunity to resolve the issue right away and reduces the likelihood of having a dispute down the road.
The acceptance letter will also help later on with collections, as we will see within the next steps.
We recommend that you have a lawyer compose a basic letter. However, don’t make it too exhausting or your customer might be hesitant to sign it. Even though this letter can assist should you ever undertake legal action, its goal is to stop collections issues from occurring, in the first place.
Step # 4: Mail the invoice and paperwork as soon as possible
Mail an invoice and any relevant paperwork as soon as the tasks are finished, or product is delivered. Incorporate the acceptance letter from Step # 3, because it helps to show that you delivered in accordance with the contract.
Adhere to the payment procedure laid out in the contract. If your customer demands that you mail the invoices to accounts payable, with a copy to the project manager ( or another person), do so. Not following the payment clause in your agreement will result in payment delays, mainly if you work with more prominent clients.
Step # 5: Follow up with clients on a regular basis
If you have paid attention to these steps, the majority of payments should show up within your current contract terms. On the other hand, it’s still wise to follow up with clients consistently. On the day that you mail the invoice, make sure that your client got it, in addition to all the paperwork.
As soon as the invoice is five days overdue ( i .e . , on day 35 of a net-30 invoice), get in touch with or email the client to find out if there are any problems. If there are no problems, try to obtain a payment date. If that payment date is forgotten again, wait around a few days and continue doing this process. If the client misses various payment dates, you might have a collections problem.
Most importantly, always treat customers with courtesy and professionalism. Under no circumstances break this rule, regardless of whether they are not paying you and are not behaving appropriately. You will have much better luck collecting slow-paying invoices by staying professional.
Step # 6: Manage conflicts professionally
Occasionally a client will not pay an invoice merely because they have a dispute. There are legitimate disputes, wherein the client is disappointed with the quality of your product or service. If your client has a real disagreement, do everything possible to solve the issue as soon as possible. Do this even if they signed the delivery acceptance letter. This method makes it possible to keep the client.
Nevertheless, certain clients “manufacture” conflicts so that they can get extra work or products at no cost. Mostly, there is entirely no dispute, per se. The client is merely keeping your payment hostage to get some free work. The majority of credit checks will root out this kind of client. However, it still occurs. In this instance, mail your client a copy of the signed acceptance letter. Generally, this method defuses the issue. It’s difficult for them to claim that they are disappointed with your work if it complies with their contract requirements and if you actually have a signed letter declaring they accepted the work.
As in the earlier step, always act with courtesy and professionalism – regardless of whether the dispute is “manufactured .”
Step # 7: Recognize when to making use of outside help
No collections technique is 100% perfect. There is a tiny possibility certain customers are not willing to pay their invoices. In cases like this, think about employing a lawyer or working together with a collections agency. Coping with past due and unpaid invoices and collections issues distracts you from operating your business and can have an effect on enthusiasm. It’s wise to let experts handle it.
Slow payments create cash flow issues
Certainly one of the difficulties of enabling clients to pay their invoices in 30 to 60 days is the fact that it could result in cash flow issues. These challenges can occur regardless of whether your business is well run. If cash flow is restricted, you could overextend yourself. Cash flow troubles may also hit you hard if the business is growing very fast. Essentially, you can find yourself with all of your hard earned money tied to slow-paying invoices.
Tips on how to solve cash flow issues
One easy method to make improvements to your cash flow is to provide customers a price reduction for early payments. In many instances, you could offer your clients a 2% reduction if they pay in ten days or fewer. Customers with available funds generally take the discount because it’s to their advantage.
Even though early payment discounts could work well, they have a restriction. Initial payments are voluntary, and clients may choose not to make them. For that reason, you can never tell if a client will pay early or 30 to 60 days later.
One of the best ways to build up your cash flow is by using financing. Unless you are eligible for a small business line of credit, the ideal alternate options for financing your small business are invoice factoring, asset-based lending, and inventory financing. These choices can quickly improve your cash flow and are accessible to small and midsize business.
Keep in mind that these choices can be used only if :
- Your clients possess great commercial credit and pay in 30 to 60 days
- Your biggest challenge is that you can’t afford to wait up to 60 days for a payment
Financing really should not be used if your clients are poor payers. Financing invoices from bad-paying clients can backfire and have an impact on your cash flow.
Invoice factoring is a tool that permits you to finance slow-paying invoices from creditworthy clients. A factoring organization could advance up to 85% of the invoice worth once you submit the invoice to your customer . This advancement provides you with the money to run your business and get bigger.
Your business will get the extra 15 %, much less a tiny fee, as soon as your customer pays in its entirety on their standard arrangement. Being approved for factoring is very easy, and lines could be opened in a week or so.
Do you need help with your invoices? Here at LetterHub, we provide businesses with invoice printing and mailing services. Get in touch with us today to learn more.
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