Making a big sale is exciting, especially for a new business. But getting paid late, spending time and money chasing overdue accounts, or worse yet, not getting paid at all, can destroy a business.

If you sell B2B, chances are your customers are going to demand payment terms. So before you start selling, it is essential to establish clearly defined credit policies that follow good credit management practices.

Being prepared to walk away from a sale is difficult, but if the payment terms a customer is demanding are not reasonable, if they are a chronically late payer, or if their credit does not warrant selling on terms, it may be necessary.

Late payments affect your cash flow

Forty-six percent of all B2B sales are extended on credit, meaning that invoices aren’t due on receipt, and according to The Atradius Group, a worldwide provider of trade credit insurance, surety, and collections services, 48.8 percent of all of those invoices are being paid late.

But more concerning still is that when an invoice went 90 days past due, there was only about a 50/50 chance of it being paid in full. It’s a problem for businesses concerned with cash flow.

So what are those businesses doing wrong? Atradius found that 81.5 percent of companies surveyed did not have credit management policies in place and only 50 percent did credit checks on their customers before selling on terms!         

How to make sure you get paid in full and on time

As a new, small business owner, growing sales is often the top priority and it can be difficult and time-consuming to determine who gets credit, how much, and for how long.  

To increase your chances of getting paid on time and in full, you must establish and follow good credit management practices from the get-go.

Here are 13 good credit management practices to increase the odds that you’ll get paid in full and on time.

1. Create policies

Establish clearly defined credit and collections policies upfront, before offering credit terms to any customers.

This should include determining how much credit you can afford to give without impacting your cash flow, deciding which customers will qualify for credit and how much, establishing your payment terms, and clarifying your collections process for overdue accounts.

For more info, QuickBooks offers an easy to use guide for developing a credit policy.

2. Require a credit application

Have all customers complete a credit application before agreeing to provide credit. There are lots of templates for B2B credit applications available online if you’re not sure where to start.

Research and get to know your customers by using credit bureaus and asking for trade and bank references. Check those references!

3. Track and review payment patterns for existing customers on a monthly basis

This will help you identify any changes that might signal a potential problem.

For example, if a customer who always paid on time begins to pay later and later, it may signal financial distress, and you will want to reevaluate their terms and credit limits before things get out of hand.

4. Communicate your policies to customers

Clearly lay out all payment terms and conditions in writing on all contracts and invoices, including late payment penalties, and make sure you actually implement your late payment charges.

5. Ask for deposits

Make sure to require a deposit for large orders, custom orders, and for new customers with limited or questionable credit history.

6. Invoice promptly

Invoice right away, and call your customer after sending the invoice to confirm receipt and highlight payment terms and due date. Follow up immediately by telephone on overdue accounts.

7. Accept multiple payment options

This includes checks, EFT, ACH, e-transfers, and credit cards. Make it easy for your customers to pay you!

8. Offer early payment discounts

Offer discounts to clients who pay early to incentivize prompt payment, such as a 2 percent discount when an invoice is paid within 10 days.

9. Refuse new orders from overdue accounts 

Do not accept orders from clients who are not paid up, and implement COD policies for chronically late payers.

10. Do not pay sales commissions or bonuses until payment is received

A sale is not a sale until the cash is received. Incentivize everyone in the company to make collections a priority.

11. Purchase credit insurance

For large accounts and/or international customers, make sure you have insurance. 

12. Focus on having a diverse customer base

Having a large and varied customer base means that a payment problem with one customer does not put the entire company at risk.

13. Use accounts receivable factoring

Accounts receivable factoring will help convert outstanding invoices into immediate cash.

Factoring is an option you can use when you can’t afford to wait for your customers to pay their outstanding invoices. A factoring company will buy your outstanding invoices at a slight discount. You get immediate cash and the factoring company takes over the waiting period.        

Don’t put your business at risk by overextending

Unfortunately, I have a client at Express Business Funding that learned this lesson the hard way. The client is a relatively small startup business specializing in design and digital printing. They were very excited when they landed a $900,000 contract with the largest brewer in Canada, which in turn is owned by an international conglomerate. Given the financial strength of the customer and the size of the order, the company agreed to the brewer’s payment terms of no deposit and payment in 120 days after receipt of goods.

The contract required the company to purchase over $300,000 in specialized materials in order to complete the job, which they had to pay for COD. Once the job was completed and an invoice was issued, it took the customer an additional 20 days to approve the invoice and enter it into their system for payment.

Close to 200 days later, the company has received partial payment and is still waiting for a balance due of $130,000. All profit from the job has been spent on financing costs and the outstanding debt is creating serious cash flow problems for the company.

In hindsight, the company should have walked away from this contract if they could not have negotiated a deposit to at least cover the cost of materials and secured better payment terms. They are no longer taking orders from this customer, but it may be too little, too late.

Be proactive to protect your business

As a new small business owner, growing top line sales is exciting, while managing credit can be difficult, boring, and time-consuming.

It is very hard to turn down a sale, but not following good credit management practices at the front-end can be disastrous at the back end when you have to spend time and money chasing unpaid invoices.

To increase your chances of getting paid on time and in full, you must establish and follow good credit management practices from the get-go. Remember, a sale isn’t a sale until you get paid!

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Anne MacRae
Anne MacRae

Anne MacRae has been in the factoring, trade financing, and asset based lending industry since 2006 and is the vice president of business development with Express Business Funding, a leading factoring and ABL company. Having owned her own business in the past, Anne brings a deep understanding of the challenges entrepreneurs face in obtaining financing and managing cash flow and she has used this experience to help hundreds of clients secure funding to grow their businesses. Anne sits on the board of directors of the International Factoring Association, Canada Chapter, and is a regular contributor on panels and in publications on alternative lending.