Here are things you can do to get paid, and to stop the problem happening in the first place:
- Insist on payment in advance or on completion: this avoids the problem of poor-paying customers, but it tends to penalise (and perhaps drive away) good-paying customers.
- Sell your unpaid debts to a factoring agency: this can cost you 10-25% of the debt, but at least the money comes in quickly.
- Offer payment terms to poor-paying customers, using a credit agency: the agency pays you upfront for the full amount, but allows the customer to pay them back by instalments over time, plus an application fee and interest component (paid by the customer).
- Improve your invoicing and collection processes: perhaps your invoices are unclear or are sent late. Do they show your bank account details clearly? Do you provide options to pay via credit card, and is this shown on your invoice? Do they show how the amount due, was calculated?
- Offer incentives for prompt payment, or penalties for late payment: you must be disciplined in refusing the discount, even if your customer pays a day late. You must also be willing to follow-through on penalties, and you must have the right terms in place to charge them any additional late payment penalties; (we will discuss this in the next section when we discuss terms of trade).
- Be persistent with poor-paying customers: you might be surprised how quickly a customer will pay, simply because you rang them. It works even better if you visit them.
- Train your accounts people to be more vigilant with collections: perhaps they need to know why collection is so important, and the negative impact it has on the business. Perhaps they don’t know it is their responsibility, or they don’t know how to call debts in. Or better yet, for a small cost, outsource your debtor management to a specialised credit management organisation that will follow these up on a weekly basis. The cost will be offset by the increased cash flow, resulting from regular and professional follow-up.
- Refer debts over a certain age to a debt collection agency: I recommend letting your customers know in advance, that this will happen if they default. People know the problems that can happen if their credit rating falls, and that being referred to a debt collection agency will affect their rating. Plus, they know they will probably be liable for hefty collection fees.