What to do when your customers don’t pay on time

What you can do to collect open invoices from your customers

(This story originally appeared in the Philadelphia Inquirer)

Do your customers pay their invoices within 30 days? Consider yourself lucky if they do. According to one recent study conducted by financial tech platform PYMTS and collection platform YayPay, a whopping 93% of businesses surveyed experience late payments from customers. This is not just a small business problem either: The average days outstanding for invoices at companies listed in the S&P 500 now exceeds 55 days.

“As federal money and assistance has disappeared we’re seeing more companies run into financial problems,” said Carl Torban, president of LEIB Solutions, a collection agency based in Maple Shade.

Anita-Michele Ferguson-Deberghes, a regional manager at Altus Receivables Management in East Windsor, N.J., agrees. “We’ve seen a big increase in collection activity. We expect that to continue.”

So what can you do to collect the open invoices from your customers as quickly as possible? Here are some strategies.

Use services like Dun & Bradstreet and Experian to do credit checks on new customers and separately establish credit limits and maximum order amounts so you can avoid exposure to risk. Make sure that your new customers fill out credit applications and that you verify all the information. Also regularly update the credit information for existing customers. Some people may find this awkward, but it’s a critical step that can minimize bad debts, particularly with new customers.

“It all comes down to getting as much detailed information as possible for the companies that you don’t know that want to do business with you,” said Torban, who also advises his clients to use the credit application process as a way to confirm payment terms.

“You need be very clear about payment terms right up front,” he said. “You need to tell the customer that this is the product or service we’re providing to you and this is the time frame for payment.”

The faster you get your invoices out, the faster you should get paid. Don’t wait until the end of the month. Bill as products are shipped and services are performed.

My company requires our clients to pay in advance by purchasing blocks of time. When the block is used up, we provide an accounting to the client and agree on a new block. That way we’re never putting money out of our own pocket. It’s not easy for some, but many smart business managers I know in law firms, construction companies and contractors charge in advance for their work through retainers or deposits. Getting cash in the bank helps to minimize the cost of a potential collection issue in the future.

We all know that credit card fees can be steep, but there is value in paying that fee so that you collect your payments at the time of the transaction. Some of my clients insist on taking payment from their new customers with a credit card and even charge a processing fee.

Many of my clients use their customer relationship management systems to schedule follow-up calls and reminders for certain customers and to setup alerts and workflows to remind in advance when invoices are coming due. Others leverage credit collection systems like Growfin and Versapay, which, depending on your company’s invoice volume, can help manage collections with more automated tracking and collaboration.

“You can use software to establish a process,” Ferguson-Deberghes said. “You can make sure that process includes making calls and sending e-mails as needed, all depending on the comfort level you have with your client.”

Torban agrees. “Being proactive is important, and good communication during the collections process is key,” Torban said. “Even getting on the phone and hearing their story is a good way to understand what’s going on to figure out a way to work things out.”

Staying on top of your receivables is critical so make sure you’re getting frequent reports listing overdue invoices, average days outstanding (for all invoices and for individual customers), and comparing accounts receivable as a percentage of sales.

I’m sure that, like my business, the great majority of your customers pay on time. So it’s important to spend the time monitoring those that routinely fall behind.

Factoring companies and services like Bluevine and altLINE will purchase an open invoice and, for a fee, take on the responsibility for collection. This can work well if you’re waiting for payment from a government or international customer which may take more time.

This should be your last option when all other collection methods have been exhausted, but even collection firms can’t work magic. Ferguson-Deberghes says most of these firms — who normally work on contingency — will get payment, on average, about 25% of the time.

“The sooner you turn over the invoice to us, the better the chance of us collecting for you and the better the rates we’ll be able to offer you,” she said.

Originally published at https://www.inquirer.com on August 22, 2023.