Communicating with Slow-Paying Clients – Part 1

communicating with slow paying customerAs a small business owner, you’re no doubt aware of the impact communication has on the success of your organization.

You may have attended lectures or webinars, or read books on the role communication plays in motivating your employees and resolving conflicts in the workplace.  But for many, the pearls of wisdom gleaned from these experiences is lost when it comes to managing their business cash flow.

While telling an employee what is expected of her, and the possible consequences if those expectations are not met may seem like second nature to you, being as candid with slow-paying customers about your accounts receivable policy can be an uncomfortable chore that’s more easily avoided than dealt with.

In most cases, fear of upsetting or even losing the customer is at the root of the problem. And that fear can have a domino effect that can negatively impact nearly every aspect of your business.

Assistant professor of entrepreneurial practice at the Whitman School of Management at Syracuse University, Ken Walsleben says, “Entrepreneurs do not want to upset their client because it’s awkward. But if you’re worried that person may not do business with you again, or that it will make you look desperate – get past that.”

Laying the Groundwork for Good Communication with Slow-Paying Clients

The best way to avoid frequent problems with slow-paying clients is by clearly communicating your expectations from the start.  Be sure to include payment terms in your contracts and on monthly invoices.

It’s also a good idea to verbally state your terms, and ask them to explain their payment policies and procedures prior to starting work with a new client to make sure that both parties are clear on what’s expected of them.

As the due date approaches, it’s o.k. to send a reminder notice.  You should also be clear about the actual date payment is expected. “Due upon receipt” and “net 30” are ambiguous, and can lead to unnecessary delays in getting paid.

Prompt Invoicing Encourages Prompt Payments

It’s a good idea to invoice your clients as soon as the job is done. Don’t wait until the end of the month to invoice your customers as doing so creates the potential for artificial bottlenecks in your cash flow.

Carrots and Sticks

Many experts recommend offering a discount to clients who pay on time and /or adding interest charges for those who don’t pay in a timely manner.  Obviously, the discount amount should be large enough to encourage prompt payments, but not so large that it significantly impacts your profit margin.  A discount of between 3% and 5% is typically offered.

Likewise, the interest amount should be large enough to encourage prompt payments, without appearing predatory.  Interest charges of up to 10% beginning at 60-days past due are not typically considered unreasonable.  After all, you’re essentially “loaning” them money – so why not get paid for it?

Use Electronic Billing if Possible

If possible, avoid invoicing via “snail mail.”  If the client requires that you send a hard copy via U.S. mail or another mail delivery system, you should comply with the request but also send an electronic copy via email.

An even better option is to invest in Xero, Freshbooks or a similar accounting and billing software that can automate the entire process for you.  Click here for a list of top billing and invoice software products featured on www.capterra.com

In part 2 of this series, we’ll discuss:

  • Dos and don’ts when speaking with slow paying customers
  • Options when it’s time to stop talking and take action, including invoice factoring

We hope you found this information helpful.  If so, please share it, and leave a comment below.  And be sure to bookmark or subscribe to our blog to read Part 2.

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