You’ve developed a great business plan and you have potential new customers. The problem is, they want to pay after you have delivered your product or service.
This makes you uneasy because the worst thing that could happen is you don’t get paid. However, you’re new to the game and you want to keep things flexible. What can you do to minimize the chances of this happening?
Know your customer
Every week at the Kaplan Group we’ll have a client ask us to collect from a business customer, but the documentation doesn’t definitively show who the customer is.
- There may not be a purchase order.
- The customer may have several different entities, and the paperwork doesn’t make clear which entity is liable.
- The business might have been sold without the vendor knowing and the order was from an unidentified new entity.
- The customer uses a trade name or DBA and not the legal entity name.
- The paperwork describes the entity name as a corporation or LLC but the entity is not actually registered.
Any of these issues can result in you not getting paid. So, at the most basic level, be sure to get the customer’s legal name, their physical address, and to verify contact information (phone, mobile phone, email). Ensure the legal name is on every order or contract.
Investigate your customer
Banks don’t lend money without investigating a customer’s credit. Vendors need to do the same. Typically vendors collect this information on a credit application. If you don’t have one, the free eBook Credit Application Handbook has 19 samples and detailed explanations of everything to consider.
Once you have information, you need to verify and check their credit. Here are a few of the things you can do:
- Check the entity name online for free with the Secretary of State.
- Contact trade and bank references.
- Run a business credit report.
We recently had a client who did a $30,000 consulting job without doing any of this. In less than three minutes and for under one dollar, we learned their customer had over $500,000 in tax liens, owned a dozen different entities with nearly $1 million in judgments, and there was no hope in ever getting paid.
Establish terms including protections
It is critical that your customer agrees to your payment terms, including what happens if they don’t pay on time. This can be incorporated into your credit application, contract, or order form. It should clearly state when payment is due and the interest rate that accrues if they are late. Make them responsible for collection costs and attorney fees if incurred to collect.
If the customer will have multiple invoices or a contract with monthly payments, an acceleration clause that says all amounts are due if one payment is late is advantageous. You may also want to indicate where litigation will occur if this becomes necessary. Ask for a personal guaranty if the business does not have a good credit history.
These are all standard terms that your customer will probably agree to as long as it is in your initial documentation. But once they are late paying, it is too late to get these protections and the collection leverage that comes with them.
Invoice promptly, accurately, and follow up exactly on schedule
You can’t get paid if you don’t send an invoice. If the invoice is sent late, has mistakes or is not clear, that gives your customer a reason to delay paying. Contact your customer before an invoice is due to make sure they received it and that there are no questions or concerns.
If they don’t pay on time, follow up the very first day an invoice is past due. If your customer learns you will let them pay late, they will.
Have a procedure in place to follow up on regular intervals on any delinquent invoices. For example:
- Email 15 days before the due date to make sure your customer has the invoice and no concerns.
- If no response, email again in four business days
- If there is still no response, call them
- Call the day after an invoice is due to inquire about payment status
- If they say payment has been mailed, ask for check number, if it is payment in full, and the date it was mailed
- If you don’t reach a live person, follow up every two or three days until you get a response via phone or email
- If 15 days past due and no engagement, mail a past due letter and send a copy by email
- If 30 days past due, call and email the accounts payable manager or finance executive with weekly follow up
- At 60 days past due, call and email business owner. Explain that you will have to escalate if they don’t pay.
- At 75 days past due, send a final notice by mail and email with a 10 day demand
- Call the owner and finance executive a few days later to make sure they got the notice
- Turn over to a collection agency that specializes in B2B claims when it is 90 days past due
This may seem like a lot of work. But, it is nothing compared to the pain and financial loss of not getting paid or always getting paid late.
Cash flow is critical for all companies and if you don’t stay on top of your receivables things can deteriorate quickly. You can always have exceptions to these guidelines. The key is to have a set of procedures that you follow consistently and exceptions are granted only when warranted.
Don’t be afraid to ask for the money that is rightfully yours and suspend providing services or products until all past due invoices are paid.
Take swift action if delinquent
Survey statistics compiled over many years by the Commercial Law League of America show that the chances of collecting an invoice decline more than one percent per week once it is past due.
By the time an invoice is 90 days delinquent, there is already a 26 percent chance it will never get paid. By the time it is seven months past due, there is less than a 50 percent chance of ever collecting.
Most collection agencies work on a contingency basis—you only pay if they collect.
When an account needs special attention, the sooner you turn it over to a reputable commercial collection agency, the much better chance you have of getting something instead of nothing.