All companies who are actively conducting business rely on their customers’ prompt payment for services and products rendered in order to stay solvent. Small companies, in particular, depend on prompt payment to ensure their survival. When invoices go unpaid, the business must allocate time to collecting amounts owed, which can be time consuming and even costly. By the time an outstanding balance has remained unpaid for several weeks or months, the likelihood of receiving full or even partial payment dwindles.
However, companies of any size can do several things to optimize the probability of prompt payment. There is no need to depend on chance or a customer’s good nature. Rather, following a few simple but specific steps can help to ensure that a customer will pay the balance due on account within the designated time period. It is important for the business to take a proactive approach rather than wait for a customer to pay late, and then be reactive. The following steps are generally effective in facilitating prompt invoice payments.
1. Know Your Customer.
Although it would be pleasant to assume that everyone is trustworthy and will be a cooperative customer when it comes time to pay for goods and services, the truth is not so simple. Many if not most companies want to pay their bills on time, but some lack the skill to operate a business efficiently. Others do not follow the company budget appropriately and thus lack the funds to make timely payments that come due.
For these reasons and others, you need to perform due diligence when making deals with new clients. There are several ways to check on a prospective client’s business reputation. One is to contact the local Better Business Bureau to see if the company has a record on file or is listed in high standing. Typically, this means the company does not have any unresolved claims against it. Disputes or complaints have either not arisen or have been handled to the satisfaction of both parties. If unresolved issues remain, you may want to avoid doing business with the company until you see how the current problems are handled. Legal records with information that is accessible to the public may also be a valid source to check.
Another way to check on your customer’s professional status is to do an online search. Type in the company name or the names of employees you are interacting with. You may want to add a term like “reviews” or “complaints” to see what comes up. You may be able to find similar information at the company’s website.
Social media may reveal some interesting facts as well. Some people post personal or company information that casts their business in a negative light. Other times, you can find glowing reports and reassuring facts about how a company does business. For example, Linked In is a professional networking website where members can provide information about themselves or their companies. Companies sometimes set up a Facebook page or Twitter account, and possibly Instagram, among others. You can learn quite a bit just by browsing sources like these to decide if you want to do business with a particular company.
2. Offer Incentives.
Motivating people’s behavior usually comes down to one of two approaches. You can either use a stick, or negative consequence, to discipline a customer for being late. Or you can try using a carrot, or reward, for customers who pay on time. Although it makes sense to assume that everyone should pay their bills on time as a matter of principle, human nature is complex. Offering a reward can serve as a stimulus to encourage prompt payment.
Many companies offer a discount or rebate to clients who pay on time, or before the due-date. A five percent or ten percent price reduction is not uncommon. Other incentives include points earned toward company rewards or a future discounted or free order of a certain amount. Sometimes the incentive is simply a small token gift representing a tangible reward, like a company-themed mug or golf hat. Being added to the list of top customers in the company newsletter, which spotlights the company’s image and focuses attention on their high-level customer status, is another way to encourage on-time payments. It all depends on the type of customers you have, and their interests, as to the best ways to elicit prompt payment of their account balances.
Quarterly or annual dinners for top-paying customers is another way to recognize and reward those who pay their bills on time. Depending on the size of the event and its cost, the celebration can be an enjoyable and upbeat way to recognize customers who remain in good financial standing.
3. Offer Creative and Easy Payment Options.
With the global economy rapidly changing in many respects, facilitating how a customer pays what it owes your business could be arranged in several ways to make it easy. The traditional way is to mail an invoice with a self-addressed and possibly stamped envelope, using the postal service. But there are other options that may be more convenient for some of your customers. For example, you might want to accept telephone payments with customers using a credit card or a bank account number for immediate transfer of funds. Of course, you may need an employee dedicated to this task unless you set up an electronic system of telephone payment.
Another method of payment is to provide a portal at your company’s website. Invoices could be paid any time of the day or night. However, you will need to add this function to your website and make sure it operates smoothly and consistently.
In-person or onsite payments is another way for customers to pay balances. However, that involves driving to your location during regular business hours, and some companies may be less likely to use that option.
Online payment systems like PayPal, Google Pay, and Wallet are attractive to many customers who conduct many of their business functions online using these services. Although there is usually a small fee attached to each transaction, it still may be cheaper than some of the other bill-paying methods.
Many people prefer using their banks to pay bills online. However, they have to be aware of when the bank will send electronic payments to ensure the payment is received on time, as some require a lead time of a few days.
When you carefully screen and select your customers, offer incentives to encourage prompt payment, and facilitate account payments in convenient ways, you will likely get good results. By accepting some of the responsibility for timely payments and taking the initiative to ensure clear communication, mutual respect, and quality customer service, your company will make it easy for your customers to respond favorably to your invoices and pay balances when due.
Although you could set up an in-house or external collections system, it is generally far easier to get paid on time when you take the proactive approach rather than the reactive one. However, if you find that some of your clients are unable or unwilling to pay on time, you can use a collection method as a backup step.
Many organizations use a five-step letter process. The first letter to the customer is a friendly reminder that payment has not been received by the due-date. This letter, which can also be an email or text message, may even offer excuses, such as holiday busy-ness or recent bad weather. The second letter is still polite, but encourages the customer to pay promptly to maintain a professional reputation. A third letter follows up to suggest the first letter or two may have been missed by the customer, so this third one is to remind the customer that the bill is now quite overdue and needs to be promptly paid to avoid any late fees or penalties. The fourth letter politely but firmly and regrettably indicates a range of possible consequences the customer may face if the bill continues unpaid. A final fifth letter may be issued with a reference to your company attorney who will follow up with an official collection notice.
The letters appeal first to the customer’s good name and reputation, then with understanding that there may have been a temporary delay in paying the bill but payment is still due. A third point is to remind the customer that their company’s good name is at risk for failure to pay. The fourth communication indicates the increasing likelihood of unfortunate financial or legal consequences if payment is not made by a given deadline. The final letter typically explains what the customer should expect as the next step in the collection process. Customers who fail to pay an invoice should not be given additional credit until their account is paid in full.
No one likes to be the bad guy in pressing others for payment. By following the three steps outlined above, you can diminish the risk of nonpayment while retaining your customers’ favorable opinion. Keeping a current customer is cheaper than recruiting a new one. Work with your customers to help them meet their financial obligations with your company. Taking a win-win position rather than a win-lose attitude can keep the business relationship healthy and strong. Even when a customer is late paying a bill, arrangements should be made for partial payments or a date should be reset for full payment to keep the business account active and in good standing.
Your customers will appreciate your good faith efforts to do business with them, and in turn, are more likely to pay on time or to make payment arrangements, rather than ignoring the bill altogether. Be positive in customer relationships to get the best possible response from them.
