Amy Hardison White

How to Release the Burden of Late Payments

Late-paying customers withhold your hard-earned cash. They also cause undue amounts of stress as you worry about when you’ll get paid, and extra work as you attempt to secure payment. There’s no crystal ball that can predict which customers will pay in a timely fashion and which ones will drag out the payment process. However, you can take steps to protect your business from late-payers, and have strategies ready if you need them.

Get it in writing. The most important thing you can do to screen out late payers is to agree to terms before you bring on a new client, and write out the terms of your agreement in a contract. A contract is a legally binding agreement between two parties. It can be used throughout the term of your relationship with a customer to remind them of what they agreed to, and in legal proceedings or arbitration (although hopefully it doesn’t come to that).

Make sure there’s a section of your client contracts that deals specifically with payment terms. Here are a smattering of payment terms to include:

  • Upfront payments: One way to avoid late payments is to ask for full payment upfront. That way there’s no opportunity for a late payment. If you’re uncomfortable asking for that much, consider a smaller upfront payment of thirty or fifty percent that is required to start the project. Make sure to outline the timeline for subsequent payments.
  • Invoicing timelines: You can dictate what defines a late payment in your contract by stating when invoices are due - for example, net 30 days after receipt. This is an important item to include especially when working with larger companies, many of which have much longer invoicing timelinesimplemented after the economic downturn of 2007.
  • Discounts and penalties: Outline the penalty a customer will incur if they don’t meet the invoicing timeline - they may be charged a percentage of the total fee, for example. And consider incentives to pay early as well. Discounts for sending payments early can be a big motivator for a customer looking for ways to save.
  • Dispute resolution: Though it may seem like overkill, including dispute resolution language in your customer contracts can give you a format to fall back on. It also lets your client know that you have a plan in place if problems arise. Here’s an example of dispute resolution language that can easily be inserted into a contract. Signature: Presenting your client with terms is the first step, but you need their signature (and yours) to prove their acceptance.

Put it on autopilot - for you and your clients. Once you’ve taken as many preventative steps as you can with a contract, make the payment process as easy as possible for both sides. Allow your customers to pay using the format that is most convenient for them. Offering them their preferred payment method may increase the likelihood of receiving payments on time. In many cases, the easiest form of payment is one they can use online - a credit card, PayPal account, or even ACH directly from their bank account. And consider if your products are a fit for a subscription billing service. The combination of online payment options plus subscription billing can reduce the instance of late payments drastically - with the exception of a declined credit card.

If you can’t take advantage of the subscription billing model, you can automate the reminder process to speed up customer payments. Use an online invoicing service that will send out invoices and reminders at specified times. In those reminders, specify the date that is approaching and the penalty that may be incurred (or discount lost, depending on the situation). Create exception reports so you get notified if customers go beyond a certain timeframe.

Be ready to manage exceptions. Even with all these measures, there are still late payers who may slip through the cracks. Let your contracts and automated systems take care of the bulk of the work so you can spend your time with just a few exceptions. Here are a few typical ones and how to handle them:

  • Your customers may be businesses just like you, and occasionally run into cash flow issues. When this is the case, consider working out a payment plan with the customer. Discuss their specific issue and a timeline when they might be able to make payments, and get this new payment plan in writing (just like your contract).
  • Other customers may have be withholding payment if they are dissatisfied with the product or service you have provided. Get on the phone and discuss the customer’s concerns to see if you can resolve the situation and secure payment. If their requests require a lot of extra work on your part, make sure to tell your customer about any additional charges. Create a statement of work that outlines the customer’s additional requirements and associated fees.
  • If you’re unable to secure payment from your customer, consider engaging a collections agency or an attorney. Collections agencies specialize in recovering payments from customers that are more than ninety days overdue. Attorneys can draft a demand letter to send to a customer, which may produce your missing payment. They can also advise you if you decide to take the matter to small claims court.

In the end, is it worth it? Putting practices in place that decrease your risk of late payments is just good business, but they don’t reduce your risk to zero. If you end up with a chronic late- or non-paying client, evaluate the specific situation and decide if you want to continue or end the relationship. Is this a customer with a solid payment history that’s just having a one-time problem, or one that repeatedly disputes invoices and withholds payments? Is working with a company that pays 90 days after an invoice is received too taxing on your business’s cash flow? Only you can decide.