You may have heard of the saying “being profitable but cash poor.” That’s exactly what some business face because of late paying customers. Slow or late paying customers can drain critical financial resources – or worse, put a small business in a cash crunch. While it may be tricky collecting from a late-paying long-standing customer or a customer going through a financial rough patch, here are 5 tips to get customers to pay on time from the National Federation of Independent Business (NFIB).
1) Give discounts for early payments. Most people, if given the opportunity, will do what they can to save money. That goes for paying bills early. If you can swing it, reward customers who pay their bill early with a discount, say of five percent. In doing so, your business may save on administrative costs by not having to send out late notices or make bill payment reminder phone calls.
2) Assess penalties. Saving money and avoiding penalties go hand-in-hand. Inform customers up front that you’ll be assessing a penalty if they pay a bill late. Some businesses offer a one-time penalty waiver fee, which is useful for long-standing customers who may have missed a payment for the first time.
3) Implement an up-front payment policy. If your business sells big-ticket products or services, consider requesting payment of 25 or 50 percent upfront. Down payments and up-front payment protect a business from a late-paying or non-paying customer.
4) Implement a staggering payment policy. Like an up-front payment policy, a staggering payment policy asks customers to make payments throughout the contract’s life cycle. For example, you might request an invoice payment of 50 percent up-front, 25 percent mid-way, and the final 25 percent at completion. This set up works best for service contracts, but can be used for product sales (similar to layaway).
5) Maintain customer rapport. Don’t only reach out to customers when they’re late paying on a bill. Instead, show your customers you value their business all year long. Newsletters, holiday or birthday cards, emails, or even a courtesy phone call keeps your company’s name fresh in the customer’s mind throughout the year.
Customers trying to stretch their cash is nothing new, and it happens more often in a tough economy. Implementing the above five tips to get customers to pay on time to improve cash flow management and maintain healthy relationships with your customers.