What happens when a customers starts taking longer to pay your invoices? Your cash flow slows down, hindering your ability to cover payroll and other operating expenses. However, a business owner must be cautious when demanding payment from their customers. While you do not want to jeopardize future business, you have to maintain your own cash flow for the success of your own business. Here are five tips on how to protect you company from slow paying customers.
1.) Always watch for red flags that indicate a customer might be having financial difficulties.
- Payments coming in late and irregularly.
- Payments being made from a personal account or credit card.
- The customer keeps asking for extensions to pay.
2.) Understand Bankruptcy Laws in your State.
If your customer goes into bankruptcy, it’s important to understand your rights and chances of receiving payments as a creditor. Unfortunately, any payments you received within 90 days of their filing for bankruptcy may be recalled. If you did business with your customer within 20 days of filing, you may have a better chance of getting paid. Educate yourself on how your customer filing bankruptcy can affect your cash flow. Understand how collection actions may affect or hinder your chance for receiving payments. It may be prudent to contact an attorney if the debt is significant.
3.) Look for alternative ways to obtain a positive cash flow for your business.
A Factoring Company will purchase your open invoices and give you a percentage up front, allowing you to continue running your business with a positive cash flow. When the invoice is paid, the factoring company will give you the remainder, less agreed upon fees.
4.) Don’t accept new business from a company that is having financial problems.
It’s a tough choice to make but cutting off a customer that is dragging out payment can be the wisest business decision. Before you take this step, have an honest conversation with your customer to see if it is a short term problem or if there is a crucial financial challenge.
5.) Look for alternative ways to get paid by the customer.
- Require a deposit or pre-payment for any future business. Doing so will help your cash flow and protect you from non-payment. You can adjust the deposit percentage based on the perceived risk.
- Require payments at milestones during the contracted work , preventing the need for a large single payment at the completion of a job. Partial payments can be set up monthly or when milestones are met.
- Agree to extended terms. Set up a payment plan that will cover your cash flow needs, but allows your customer a longer time to pay, helping their business as well. Charge the customer a fee for financing.
- Exchange services for services. Does your customer have a product or service you can utilize? Set up a barter transaction or negotiate a transfer of assets instead of a cash payment.
- Discuss their cash flow. Is it a seasonal business and their cash flow will improve in the coming months? Will they be receiving a large payment from their customer?
- As a last resort you can use a collection agency or talk to an attorney.
Anytime you change the terms of payment, have the customer sign a written contract and be specific about the terms and length of the changes. Communicate with the customer and verify that they understand the terms and fees.
Business owners have a responsibility to protect their business from challenges like cash flow deficits. A business owner should always get to know their customers and understand the customer’s business and the challenges associated with the industry. Factoring is a great way for business owners to protect their cash flow and maintain customers that may be have difficulties.
AMERICAN RECEIVABLE has been the #1 rated Factoring Company in America for 11 years consecutively. We work individually with each client to find the best solution for keeping cash flow positive and consistent. We have dedicated account managers and pride ourselves on helping our clients obtain the resources they need to grow and succeed in today’s marketplace.
To receive your free quote call 1-800-297-6652 or complete our quick online application form.
