Everyone loves receiving timely payments. However, as a business owner dealing with varied clients, you may have to face delayed payments from customers at some point. This can lead to a cash crunch, which would mean that you would have to borrow more money to handle your operating expenses. While this is a tricky situation, you can keep this in control by adopting practices to prevent late payments from occurring in the first place.
Payment delays can happen due to many reasons, ranging from a customer simply forgetting the due date to inadequate funds in the customer’s account. However, there are precautionary steps you can take to reduce the frequency of such payment delays and prevent them to a certain extent.
Read on to know how you can increase the chances of getting paid on your schedule!
Prevention plan: how to avoid late payments
Step 1: Have a written record of your terms and conditions
Before you invoice your customer, be transparent with them about your terms and conditions, payment schedules (for example: 40% deposit in advance and the remaining 60% upon completion), interests and late payment fees, and any debt collection procedures that you will follow in the event of a delayed payment. Communicate these in writing, and get the customer to sign it. Doing this online with digital signatures makes it easier. Then, if they don’t follow through with payment, you can show them the form they signed as proof and use it for any legal recourse.
Step 2: Double-check before you make a sale
If you’re considering offering customers credit, do a background check on them to understand their financial history first. If you’re unsure of their reliability, wait until you receive payment to ship your products. You can also reduce non-payment risks by reviewing your payment terms and maintaining an accurate AR aging report that shows the details of any late payments. This will give you an idea of which customers consistently fail to meet your payment terms, so you can decide whether you would like to continue doing business with them.
Step 3: Communicate well
It’s always best to send invoices out as soon as the goods or services have been provided, and keep in regular contact with your customer from that point on. You can ask them for feedback on the service or product as a way of following up on the invoice. It’s always possible that you missed something in your invoice, so communicating with the customer about whether they’ve received an invoice with the correct details will help you eliminate any problems on your end and get confirmation that the next step is up to them.
If you have many customers who are lagging behind in payments, it may mean you need to communicate with them more. Once your product has reached the customer, ask for proof of delivery or an acknowledgement of receipt from them. Besides reminding them to pay, this may come in handy later if they claim that they haven’t received the product or if you need to recover your dues.
Step 4: Make payments easier and encourage advance payments
If possible, bill your customer upfront so you can receive your dues immediately. Offering multiple payment options, such as debit card, credit card, online payment gateways, and offline payment modes, will make it easier for customers to make payments faster. If they’re new or one-time customers, you can also request an advance payment to secure the order (which also helps with cash flow). Getting an advance payment is easier if you have a great track record and attractive testimonials, as your customers will be more likely to trust you. As a bonus, you can incentivize them for early payments, by way of discounts or goodies.
It’s helpful to allow installment-based payment plans if your customer can’t afford to pay you the full sum immediately. Negotiate an amount that they can afford, and specify the payment period. Although it will take a bit longer to receive the complete amount, you’ll still get a portion of your payment up front, and you’ll receive additional portions each month (or based on the payment terms you’ve set). This will help your cash flow while easing your customer’s burden. It’s a win-win situation!
Step 5: Automate payment reminders
Setting up automated payment reminders is a good way to alert your customers about payments due, without requiring extra effort from you. You can set these up in your online accounting system with a custom schedule, ranging from a payment reminder a week before the due date to past-due reminders after the due date. When your customer is reminded ahead of time, chances are higher that they will remember to pay you on time as well, speeding up the payment collection process.
Being prepared to prevent and resolve late payments can help your business stay strong in the long run. Set your cash flow up for success by keeping a record of your payment terms, researching your customers’ credit history, staying in contact throughout the sale, encouraging advance payments, and using a well-equipped accounting system like Zoho Books. With this plan in place, you can minimize the risks of late payments and keep your business and cash flow secure.