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Home Cashflow Business Blog 6 debt collection tips for small business owners

Managing cash flow is one of the biggest challenges for many small businesses, and few things are more frustrating than chasing customers who don’t pay on time or are refusing to pay altogether.

At some point, every business will encounter a customer who won’t pay, can’t pay, or simply disappears when payment is due. While late-paying customers are a real bugbear for small business owners, it’s worth remembering that they generally fall into one of three categories:

  • Those who usually pay on time but are facing financial problems
  • Chronic late payers
  • Those who have no intention of paying your bill

Most small businesses will encounter customers who belong to each of these groups. Because their situations are different, the way you handle them should be too. A long-time customer who has always paid on time deserves a more sympathetic approach than someone who pays late each month – and sometimes not at all.

The way you go about chasing your debts will have an impact on the likelihood that you are paid but will also reflect on your brand and reputation. For this reason, it’s critical to have a robust, documented approach for collecting overdue payments.

There are a number of simple things you can do – both upfront and during the debt collection process – to improve your chances of securing payment while maintaining your client relationships.

MANAGING DEBT RECOVERY FOR YOUR SMALL BUSINES

01. Set expectations upfront

You’re less likely to have issues with unpaid invoices if you set expectations with your customers upfront. Be clear on your credit terms and ensure you enforce them – if your customers learn that nothing happens if they pay a few days late, they may well be a week late the following month and even later in the future. Tell customers that you charge a fee for late payment – and ensure that you bill them for this amount where payment is overdue.

 

2. Be proactive

Your debt collection process should start on the day payment becomes overdue. Research consistently shows that the longer a bill goes unpaid, the less likely it is to be paid, with outstanding bills only 74% likely to be paid after three months. For this reason, it’s critical to be proactive.

If you haven’t received payment by the due date, follow up with the customer. This might be via email, phone, or an automated reminder from your accounting software. You’ll often find that your customer may simply have forgotten to pay or misplaced your banking details. Reaching out to your customer as their bill becomes overdue also gives them an opportunity to explain why payment hasn’t been made.

 

3. Be prepared

Before you get in touch, review that customer’s file so that you’re familiar with their payment history. Is this a once-off oversight or is there a pattern of late payment?

Have a plan for dealing with any excuses or objections that might arise. If the customer claims they didn’t receive your invoice or don’t have your payment details, email these through and ask the customer to confirm they’ve been received. Ask when you can expect payment and have a calendar in front of you so that you can agree an exact date with your customer.

04. Charge a late fee

Charging a late fee is a simple and effective way to encourage your customers to pay on time. Let them know that you charge a fee for late payment – and ensure that you actually charge it. This shows that you’re serious about requiring on-time payment and demonstrates that you have a formal process for managing late payers.

If you don’t already charge a late fee but would like to start doing so, start by communicating the change to your chronic late payers and monitor incoming payments to measure whether it’s having an impact.

5. Be persistent

Your debt collection process should detail how – and how often – you’ll contact your customers to chase a late payment. Phone is generally a more effective way to secure a payment commitment but emailing a copy of the overdue invoice(s) can also be helpful.

Where a customer has made a promise to pay, diarise the date they’ve committed to and if payment isn’t received, call them the following day.

06. Hire a debt collection agency

Even with a robust debt collection process in place, there may be situations where you’re best to pass the problem to a debt collection agency. Perhaps your customer keeps promising a payment that never arrives, or maybe they’ve just disappeared.

A professional debt collector specialises in recovering unpaid bills – if you’re getting nowhere, it makes sense to outsource your debt collection activities. Most agencies operate on a ‘no collect, no fee’ basis, so there’s nothing to lose!

If late customer payments are making it difficult to manage your cash flow, Cash flow Solutions may be able to help. We offer a free 30-minute consultation where we can explore your cash flow challenges and suggest potential solutions both short-term and long-term. Contact us today for more information or to book a no-obligation call.

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