Running a successful business requires effective financial management; an integral part is ensuring your clients pay you on time. Chasing after payments can be time-consuming, stressful, and even put your business’s survival at risk. This is compounded when you’re a small business just starting. This article outlines strategies to help clients pay, focusing on cash payments, credit checks, professional contracts, accounts receivable follow-ups, and legal recourse.
Deal in Cash First
One of the best ways to avoid delayed payments is to ask for cash payments, especially when starting a business relationship. While it may not be feasible for all businesses or clients, it minimizes non-payment risk, as cash transactions provide instant payment. This practice also allows you to build trust with new clients. Once you are confident of their reliability, you can offer credit terms. This sounds counterintuitive, but many businesses use the same principle when creating relationships. Even when credit is extended, it is rare to start by offering 100% invoice credit. Rather roll it out in stages allowing a greater percentage of the invoice to be paid out over time as the relationship ages.
Thorough Credit Checks
If you offer credit terms to your clients, conducting thorough credit checks before accepting a new client or offering extended credit terms is crucial. A credit check provides insights into a client’s financial history, ability to pay, and overall financial health. It helps to identify potential ‘red flags’ such as previous defaults, late payments, or signs of financial distress. Understanding the client’s financial risk lets you decide whether to proceed with the business relationship and under what payment terms.
A professional contract is a must-have tool for any business. It ensures both parties are clear on the scope of work, the payment terms, deadlines, and what happens in the case of non-payment. These contracts provide a legal basis for your business relationship and can help to prevent misunderstandings or disputes. A well-drafted contract will include details about the payment schedule, preferred payment methods, late payment penalties, and the process for dispute resolution. Consider consulting with a lawyer or legal professional to ensure your contracts are robust and legally sound. This is very important because contracts that do not agree with the law of the land may be impossible to enforce.
Accounts Receivable Follow-up
Effective management of your accounts receivable is essential to maintain healthy cash flow. This includes timely invoicing, regular follow-ups, and immediate action when a payment is overdue. Regular communication with your clients about their account status can remind them of their obligations and help identify potential payment issues early. Using an accounts receivable ageing report can help track unpaid invoices and prioritize your follow-up efforts. The critical to accounts receivable is a feedback loop. If a debtor becomes difficult, extending more credit to them is unwise. If you feel you must, you should tighten the credit terms going forward or seek further assurances.
Legal Recourse: Debt Collector or Court
Despite best practices, there might be situations when a client doesn’t pay. In such cases, you have legal options at your disposal. The first step can be to involve a debt collection agency. These professionals have the expertise and tools to recover debts more effectively than you might be able to on your own. Debt collectors do not have a reputation for being pleasant people, so you want to use this when you feel the relationship with the debtor is untenable.
You might have to take your client to court if a debt collection agency fails. This process can be lengthy and costly, but in some cases, it may be the only option left to recover your money. Consult a lawyer to understand the best course of action based on your situation.
In conclusion, getting clients to pay on time requires a proactive approach from the start of the business relationship. By implementing these strategies, you can reduce the risk of non-payment, maintain a healthy cash flow, and ensure the financial stability of your business.