Do some of your customers take unreasonable time to pay, consistently holding out for 60, 90 days or more?
In most cases, they probably have (or could find) the money to pay much sooner. They ought to—having made the purchase and agreed on your terms in the first place.
The reason for the delay is simple. To be blunt, they’re using you.
Don’t take it personally. First of all, it’s probably not just you. Customers who routinely take several months to pay their bills generally do the same with all vendors who will tolerate it. And it saves them tons of money, at your expense.
In essence, those customers are financing their own business and lifestyle on the backs of ethical suppliers like you. Instead of paying interest on loans, leases and lines of credit, they may create a pool amounting to hundreds of thousands or even millions of dollars leveraged from overdue accounts payable, on which they pay no interest at all. It’s interest-free capital for them.
It’s also completely unfair to you. You work hard to pay your own suppliers, employees and landlord—plus materials you inventoried and faithfully supplied to customers, including the slow-paying ones.
The knock-on effect can be brutal. Your own business relationships inevitably suffer. It can become impossible to pay your own bills while perpetually waiting on (and wasting energy chasing) big receivables. In time, you’ll lose credibility and have accounts frozen. And as if that isn’t enough, the stress of managing cash flow around ongoing payment bottlenecks and juggling reputation management can sap the enjoyment from doing what you once loved.
But you’re not the damn bank, and it doesn’t have to be this way. Here is what to do:
- Charge late fees. Unless you are operating a financial institution, you may not be allowed to charge “interest”—but as long as you have evidence the customer consented in advance, you can (and should) charge 1 to 3 percent monthly in late fees. It’s entirely worth revising your sales contracts and terms of service to be sure all customers agree to pay such fees on overdue balances. State both the monthly and annual rate in your terms, i.e. 2% per month, equal to 24% per annum.
- Re-negotiate payment terms. Some companies set unfair policies allowing them to pay all suppliers after a longer than normal period, insisting on 60 or even 90 day terms. If you’ve been in business any length of time, you can probably list a few such operators—generally larger ones with other win-lose policies. In most cases you can re-negotiate this requirement, explaining that your own vendor agreements depend on standard payment terms and you must follow suit order to ensure uninterrupted supply and remain solvent. If they refuse, seriously evaluate whether or not their business is worth the very real cost to you and build in contingencies.
- Send overdue accounts to collections. Be clear with your customers that accounts more than a specified number of days overdue are automatically sent to your collection agency. Send a reminder a week or two before the deadline, and a final notice shortly before submitting the account. Chances are the customer will pay—and if not there must really be a problem. Either way, you are being intelligently proactive and making a clear statement that you’re not the bank.
Don’t be timid in taking charge of your receivables and standing proudly behind your terms. If your product or service is of value, customers will stick with you. And they’ll pay much quicker knowing your late fees are more expensive than conventional lines of credit.
Need more help getting paid on time? Be sure to download my 10 Pro Debt Collection Tips and get your accounts receivable flowing like never before! Remember, only one collection agency lets you easily submit accounts online, 24/7!