Is your small business struggling to get clients to pay your invoices? There are strategies you can use to get debtors to pay you.
It’s easy to fall into the trap of believing it is just small customers like startups and micro-businesses that struggle to pay their bills.
However, big companies and, dare we say it, big Governments can let their small creditors down by failing to pay or delaying payment.
Small businesses are the economy’s backbone, providing millions of people with employment opportunities. However, small businesses often face challenges such as poor payment practices that can threaten their survival. Protecting small businesses and ensuring they receive fair compensation for their goods and services is important.
Prompt Payment Code
If you’re in the UK, the ‘prompt payment code’ is on your side. The UK Government created the rule in 2008, and even though it is voluntary, directors and CEOs of large businesses must personally sign the code. To avoid doing so is not a good look, and it could damage their brand reputation.
The result is some 3000 companies now paying their bills within thirty days. This is a big win for small businesses. The US and other regions need a similar rule to protect small businesses. In the meantime, we have some strategies you can use immediately.
Strategies To Get Debtors To Pay
When dealing with business debtors, it’s essential to approach the situation strategically to increase the chances of receiving payment.
This business blog has some strategies for you that will encourage debtors to pay up, including:
- Revision of payment terms and conditions
- New customer due diligence process
- Improved communication
- Non-payment escalation
1. Payment Terms And Conditions Strategy
For small businesses, reviewing and revising the terms and conditions of contracts is essential to ensure that you have legal protection if you need to pursue payment through legal means.
Revise payment terms and conditions to include the following:
- The invoicing process
- Late payment fees and penalties
- Cancellation, refunds, and returns policy
- Taxes and other charges
- Dispute resolution process
- Governing laws and jurisdiction
- Contract termination
- Confidentiality clause
Regarding payment terms and conditions, startups and small businesses often prioritize securing sales over creating a detailed agreement. Their primary focus is generating revenue, and they want to make the purchasing process as simple as possible for their customers.
However, businesses must establish clear payment terms and conditions to protect themselves and ensure timely payment.
When creating terms and conditions for the payment of services, it’s essential to include specific information that clarifies the agreement between the service provider and the customer. While the exact content may vary depending on the nature of the services and the industry, you can add some key elements to your payment terms and conditions.
Describe the invoicing process so your client is informed and accepts it. In this section of your payment terms include:
- How invoices will be generated – including the name of third party provider you use for invoicing and email delivery of the invoices so your client can white list the email address for delivery to their inbox – not the spam folder.
- The frequency of invoicing (e.g., monthly, quarterly) so there are no surprises when invoices arrive.
- Required information to be included on the invoice (such as purchase order numbers or specific billing details). Collect this information before the first invoice has been created and delivered. Setting up your client record in your accounting app with all the correct information, including the business identity, tax number, and email address, will prevent delays in the payment of invoices.
Clearly outline the payment terms, including the currency accepted, payment methods (e.g., credit cards, bank transfers), and any specific payment instructions or deadlines.
Specify the fees or charges associated with the services rendered. This may include hourly rates, flat fees, subscription costs, or any other pricing structure applicable to the services.
Late Payments and Penalties
Avoid shying away from communicating the consequences of late or non-payment of your invoices. Your payment terms and conditions include any late payment fees, interest charges, or penalties that may be incurred. Clearly explain any grace periods or procedures for addressing late payments.
Communication is key with all customers. It’s a good idea to explain this term at the outset before signing a new customer so there is no misunderstanding of the late payments procedure.
Refunds and Cancellations
Customer service can make or break a business. Your payment terms and conditions will need a policy for refunds or cancellations that includes any applicable fees or conditions for requesting a refund. Specify any non-refundable deposits or upfront payments. Dealing with this condition before signing a client will save your business any adverse sentiment when a service is canceled.
Your business hopes it will never happen, but you must include a dispute resolution section. Outline the steps to take in a payment disagreement or dispute. Depending on the agreed-upon terms, this may involve mediation, arbitration, or legal action.
Taxes and Additional Charges
Clarify whether the fees quoted for the services include any applicable taxes, duties, or additional charges. Specify if the customer is responsible for any taxes or fees that may be incurred. No one likes surprises when it comes to additional charges. Transparency is key so list every additional price or tax for your services or products.
Explain the circumstances under which the payment agreement may be terminated by either party. This may include breach of contract, non-payment, or other specified conditions. Termination is far from your mind when you’re about to sign up a new client. But just like the need for a clause for late payment fees and penalties, a termination clause is necessary too.
Governing Law and Jurisdiction
Specify the governing law and jurisdiction that will apply to the agreement, determining which laws and courts will have jurisdiction in case of legal disputes. Nothing shouts professionalism more than showing your customers you know your rights and their rights with the appropriate governing laws.
You will also adhere to your obligations and expect your customers to meet their responsibilities.
2. New Customer Due Diligence Strategy
What due diligence can businesses do to qualify customers to prevent non-payment occurrences?
Businesses can perform various due diligence activities to qualify customers and reduce the risk of non-payment, including:
- Credit and reference checking
- Customer screening and financial checks
- Prepayment, deposit, guarantee, or collateral
- Non-payment insurance
- Ongoing monitoring
Credit and reference checks
Conduct credit checks on potential customers to assess their financial stability and creditworthiness. This involves obtaining the customer’s permission to access their credit history, reviewing their credit score, and evaluating any outstanding debts or payment issues.
Request references from potential customers and follow up with those references to gather information about their payment history and reliability. Contacting previous service providers or suppliers can provide insights into the customer’s payment behavior.
Customer Screening and finance checks
Implement a customer screening process to identify high-risk customers. This can involve reviewing public records, verifying business registration and legitimacy, and searching for negative feedback or reviews.
Request customer financial statements, particularly for larger projects or long-term service contracts. Analyzing these statements can give you an understanding of their financial health, liquidity, and ability to meet payment obligations.
Deposits, prepayments, guarantees, or collateral
Consider requesting a deposit or prepayment for your services, especially when dealing with new or unknown customers. This helps ensure that customers are financially committed to the project and reduces non-payment risk.
Sometimes, you may request guarantees or collateral to secure payment, especially for larger projects or high-risk customers. This can include personal guarantees, letters of credit, or assets that can be used as collateral.
Consider obtaining business insurance that covers non-payment to protect your revenue. In the same way, you take out house insurance should an event damage it.
Non-payment business insurance gives you peace of mind that your work will not go unrewarded. With this insurance cover, your business can take on a small client or a startup with no credit history.
Your business can mitigate against the risk of providing high service volumes with your big customers, knowing you have an avenue to secure funds.
Continuously monitor customer payment patterns and conduct periodic credit checks for existing customers. This helps identify any changes in their financial situation or payment behavior that may indicate an increased risk of non-payment.
Remember that each business and industry may have specific considerations when qualifying customers, so adapting these steps to your circumstances and seeking professional advice is essential.
3. Improved Communication Strategy
By maintaining an open and consistent communication channel with your client, the debtor can clear up any early signs of late payment concerns. Clearly convey the terms of the debt and the consequences of non-payment. Promptly respond to any inquiries or requests for information.
Escalate the challenge your team is having collecting payment to senior management. The executive likely has no idea your business has difficulty collecting invoice payments. Before escalating your issues to top levels, ensure your business has appropriate options for payment and sends out reminders.
Most, if not all, third-party accounting apps like Xero, MYOB, and Quickbooks have an invoice reminder feature. You can set and forget the email reminder feature to occur a week or two after the due date. If this action does not result in payment, escalate to using a human to make a phone call to call in debt. Be polite and professional, emphasizing the importance of timely payment and offering assistance if needed.
If your client, the debtor, is facing financial difficulties and they are upfront about their short-term challenges, you can consider negotiating a payment plan that suits their circumstances. This can help them fulfill their obligations without causing further strain on their business.
Showing empathy in your client’s time of need will work in your favor when it’s time to renew contracts. Your client will remember how accommodating your business is and confirm why they must continue to work with you. Plus, they will likely refer you to other prospective clients so you can grow your business.
Businesses off incentives to win new customers all the time. Offer incentives for early or full payment. Plus, include discounts, rebates, or extended credit terms to motivate debtors to settle their debts promptly.
4. Non-payment Escalation Strategy
Your business believes it has tried everything to get paid, and nothing has worked. Consider legal action, credit reporting, and using a debt collection agency.
Debt Collection Agencies
Consider hiring a reputable debt collection agency if your internal efforts are unsuccessful. Debt collection agencies have the expertise and resources to pursue debtors more effectively.
Liens and Legal Action
In some cases, placing a lien on the debtor’s assets or initiating legal action, such as filing a lawsuit, may be necessary to recover the debt. Consult with legal professionals to understand the specific steps required in your jurisdiction.
Inform the debtor that non-payment may result in negative credit reporting, potentially impacting their ability to secure future credit. This consequence can motivate debtors to prioritize payment.
Consider reviewing internal processes regularly. You can use an internal auditor or outsource the job when necessary to ensure your own credit policies, invoicing procedures, and customer screening methods are robust. Strengthening these processes can minimize the chances of future defaults and make debt collection more efficient.
Remember, it’s crucial to remain professional and adhere to applicable laws and regulations when dealing with debtors.