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What can small businesses do about late payments?

Posted by Deepshikha Shukla

August 24, 2022

Chasing down late payments is an ongoing administrative burden for many small businesses. However, today’s economic uncertainty is making the issue of overdue invoices an even bigger obstacle to managing cash flow.

Even in the best of times, small businesses don’t often have the working capital on hand to manage the interval between paying the required expenses to finish a job and receiving payment when it’s completed. Consistently recovering debts also takes time and money, which detracts from running the business.

Meanwhile, a YouGov survey suggests the pandemic contributed to an environment in which B2B payments are increasingly late. Around one-fourth of small business survey respondents reported they were failing to receive payments until 20-30 days past due, and nearly one-third reported that delinquent payments were putting their business at risk of closure.

No doubt, late payments are a frustrating obstacle to managing your business’s cash flow, but there are steps you can take to deal with them. For starters, businesses are more likely to receive timely payments by targeting clients while their invoices are still outstanding, rather than waiting for late payments.

Here are eight ways small businesses can deal with late payments:



1.  Leverage invoice factoring



Invoice factoring is a form of financing that lets businesses get paid sooner on invoices for work they’ve already performed. The factoring company advances your business a portion of the money due on the invoice, usually 80% to 90%.

The factoring company then assumes responsibility for collecting the invoice. After your client pays the entire invoice, the factoring company sends you any remaining funds left after the loan is repaid, along with interest and any other fees.

The benefit of invoice factoring is that it provides quick funding for businesses that qualify. The downside is that it is among the costliest types of business financing.

2.  Encourage more frequent payments



Ask clients to pay smaller amounts on a more frequent basis, based on the assumption they’re not able to pay the full amount at once. Divvying up payments into smaller installments can help clients preserve their cash flow without impacting yours. Consider drafting a new payment agreement to formalize the arrangement.

3.  Implement end-to-end electronic invoicing



Cloud-based invoicing software facilitates faster payment, since clients can pay at their convenience. Just be sure that your online portal contains complete customer data with the right payment terms for each customer. Using a digital system also lets you automate repetitive tasks, which boosts efficiency and enables automated payment reminders to clients.

Once you’ve automated these redundant invoicing processes, such as sending the first payment reminder, create different types of collection processes by segmenting clients using variables such as the size of the account, the amount owed and how late their payment is.

Segmenting clients will help you focus on risky accounts that often pay late. Such historically “late payers” should not only receive reminders before their invoice is late but should also receive different payment requests compared to your large accounts. The latter could receive a more personalized reminder, perhaps beginning with a courteous call, for example.

Finally, it is best practice to send a single reminder for all money owed rather than individual reminders for each invoice. This will keep you from inundating clients with multiple messages about invoice due dates.

4.  Offer payment options



Accepting a wider range of payment methods, such as mobile payments, digital wallets and online payments, can help you get paid sooner. Given the ease of payment, customers are more apt to pay faster and sooner than if they had limited options. Offering more payment options also conveys your commitment to providing a good experience to clients.

5.  Offer early-payment discounts



Offering a small discount for early payments or prepayments can spur clients to pay sooner. Inform clients about early-payment discounts while also sending payment reminders at regular intervals.

6.  Track credit history



Tracking your client's credit and payment history can help you predict the likelihood they will pay on time. You can also check their credit report to see whether there are any defaults or court actions in their name, as well as the types of credit they’ve received, which is information you can consider when creating a collection strategy.

7.  Charge late fees



To cover expenses incurred when pursuing late payments, as well as to encourage timely future payments, add a late fee to the balance on overdue invoices. Alternatively, you can hold on to existing work or pause future work until you are paid as a form of penalty.

In most cases, businesses are legally allowed to charge a reasonable amount for overdue payments. Make sure customers are aware of your late fee terms in advance, that they have agreed to it, and that your fees comply with any limits set by your state. Also, double-check that your agreements and invoices clearly state when payment is due.

8.  Hire a collection agency or lawyer



Hiring a collection agency or debt collection attorney should be your last resort when all other options have been exhausted. If you are uncertain as to how likely the client is to pay, you may wish to start with a collection agency. Be mindful doing so will almost certainly sour your relationship with the client, and debt collectors can charge as much as 50% of the amount due.

A debt collection attorney is often recommended when nonpaying clients owe $5,000 or more. They can also be more effective in recovering debts from large companies, which have more resources to combat debt-collection efforts.

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