Receiving late payments can be devastating for small business and it can be tricky to know how to collect late payments from customers. Small business owners depend on timely payments to keep their business alive and growing, every payment matters. Unlike big businesses, who many times have flexible budgets, small businesses only get paid and make money when they have that check in hand. And, the small business owner is usually the last to be paid after paying salary and regular office bills.
Let’s dive a little deeper into this issue and find some creative methods to overcome it!
First, let’s take a look at the effect of late payments on small businesses.
How Late Payments Hit Small Business in the U.S.
Let’s start off with some stats:
According to a 2017 Entrepreneur.com survey:
- 79% of small business owners aren’t able to pay themselves
- 23% can’t afford to hire new employees
- 17% aren’t able to offer pay increases or bonuses to employees
Additionally, the study found that if small business were to be consistently paid on time, small to medium sized businesses would be able to hire around 2.1 million new employees. That hiring boom would help to cut the unemployment rate in the United States by 27%! After all, small businesses employ the majority of U.S. citizens and make up the majority of all business. In fact 99.7% of all U.S. business qualified as “small business”.
However, even though small businesses are in the majority, only 50% of them are still in business five years later. One of the biggest causes of small business failure is the inability to maintain a steady revenue stream.
Many small business, and especially start ups, depend on payments from their clients or customers in order to stay in business. It takes a while for small businesses to build up any kind of financial security and net worth. So in the early years of small business development, timely payments are crucial if that small business is to be able to promote themselves, hire employees, pay their bills, and make it past year one in the tough economy.
When small businesses are paid late, or not at all, they get stuck in a perpetual cycle of living day to day. Small businesses are forced to keep doing business with those clients who keep sending in late payments because they don’t have the consistent revenue to grow and expand their connections and services. It seems like an endless cycle that small businesses can’t find a way out of.
But, what if there was a way to turn it all around?
Get Off the Late Payment Merry Go Round
You don’t want to lose you’re most lucrative customers, but you also don’t want to be taken for a ride either. How do you collect late payments from your customers while still maintaining your business relationship?There needs to be balance, a mixture of assertive and understanding.
Use these following tips to avoid the trap of late payments or to get out of the cycle if you’re already in it:
1. Set Your Payment Timetable From the Start
Many small business end up accepting late payments simply because they never specified a specific payment system. Don’t let that happen to you! If you are clear about your payment system at the start of a new business relationship, you’re less likely to have customers and clients who slip up on payment due dates. If a customer thinks they can get away with paying you late or even not at all, they will!
However, it is important to be flexible in some cases if a customer is struggling to meet a payment deadline. Sometimes it can be hard to get all the bills paid on time, small businesses know this all to well.
If you do have a loyal customer who comes to you with a concern that they may have a late payment, be open to working with them and finding a solution that works for you both. Maybe that extending the date for payments to be made, but it could also mean setting up an incremental payment system as well. Bottom line is, work with those customers who are genuinely invested in your business relationship.
2. Collect and Organize Your Contact Information
If you do run into a problem with past due or non-existent payments, you need to know who to contact. At the start of any business relationship, be sure to request your client’s work phone number, business address, email address, cell phone number, and any other pertinent contact information.
You’ll want to have a variety of contact methods available to you so you can reach out to your client and hopefully get a quick response.
You can start by sending a reminder payment letter in the mail, then a friendly reminder invoice email, and finally a phone call. The more contact info you have for a specific customer or client, the more likely you’ll be able to resolve your issues.
Additionally, don’t be afraid to contact multiple people at the company or in the command chain. Making several people aware of a late payment issue will help to spur the urgency of your request.
3. Have a Plan in Place
When going about collecting late payments from clients or customers, it’s important to have a plan in place to help guide you along the way. It’s already a sticky situation and you don’t want to make it worse by accidentally getting overly emotional or talking to the wrong people.
If you’re dealing with several late payments, organize them by priority:
- Which payments are the latest?
- Which late payments are costing us the most money?
- Is this late payment a repeat problem?
Once you have your priorities laid out, it’s time to take action!
Be real with your clients, you will have to ask them some uncomfortable questions. But, like I said before, it’s important to be understanding and composed through the whole situation. However, you do need a way to ensure you’ll be paid, rather sooner than later. Set up a payment plan with amounts that work for the client if they’re struggling financially or broaden the methods of payment you accept (cash, check, online payment etc.).
If all that still doesn’t work, you can pursue the legal route as well, making it clear that their dismissive behavior will not be tolerated. However, don’t jump the gun with this. This option should be your last and final resort. And hopefully, it won’t come to the point where you need to get lawyers involved.
It’s a balancing act to know how to collect late payments from customers while continuing a strong business relationship. It’s hard enough for any small business to succeed, let alone do so without getting paid! This is the start of a vicious cycle, with small businesses unable to pay their bills on time, and so it goes…
Have you been stung by the late payment bug? Are your customers holding-out on you, and if so, for how long?