Factoring Blog

Handling Slow Paying Clients

handling slow paying clientsSlow paying clients can be one of the biggest threats to your cash flow. Knowing how to handle slow paying clients can mean the difference between having good cash flow and having cash flow problems. There a number of ways to handle this, however we would like to focus on prevention. The fact is that you will be better off if you can  avoid problem customers in the first place.

This means that you need to have a two-pronged strategy. The first part of the strategy will help you identify which prospects (or customers) have a good chance of being good payers. Obviously, it will enable you to identify the potential bad payers so that you can avoid offering them payment terms to them. The second part of the strategy involves using an invoice management process that will help ensure that your customers pay on time. While there is no perfect strategy, combining these two will help maximize your cash flow and minimize your collection headaches.

How to screen commercial customers for good credit

Screening the credit of your commercial customers is relatively easy. As opposed to personal credit reports, commercial credit reports on corporations are available through a number of credit service bureaus and can be bought by any business owner. The most well-known providers for this service are: Dun & BradstreetExperianCortera and Ansonia. These companies sell a variety of credit reports that give you information on your customers financial health. More importantly, they also show their payment track record with other suppliers. This is a very good indicator of how they will pay you! While interpreting these credit reports goes beyond the scope of this article – they tend to be relatively straightforward to understand. One note of caution, if you screening a customer forever large sale you should consider getting reports from more than one credit bureau. Lastly, remember the credit screening is as much an art as it is a science, so be sure to use your own judgment as well.

How to manage your invoices

Managing your invoices properly is critical if you want to get paid on time. Keeping on top of this process will be very important if you want to minimize the cash flow problems that can be created by slow paying customers. Here are some suggestions of things you can do:

  • Acceptance letters. Are you using an acceptance letter that is signed by your customer once your product/service is delivered? If you’re not, you should consider having an attorney draft one for you. This letter serves two purposes. First, it gives you immediate tangible proof that your customer accepted the delivery and was satisfied with it. Second, if there is a dispute, this letter can help you prove that the delivery was made to your customer satisfaction.
  • Review your accounts receivable aging report. You should review your accounts receivable aging report on a regular basis. This will help you identify customers and invoices that could be turning into a problem. In this game, early detection is critical.
  • Verify that the invoice has been received. You should send your customer an invoice, along with a copy of the acceptance letter, as soon your product or service has been delivered and accepted. Additionally, a few days later, you should call/e-mail to verify that they were received. A large number of late payments are due to invoices that were “misplaced”.
  • Performance disputes. Having a performance dispute with your customer can be a major challenge. Your best bet is to handle these tactfully, gently, a professionally. Obviously, if their dispute is reasonable and well-founded, you should fix the problem immediately. However, if they claim to have a performance dispute and it is unreasonable, you should consider providing them with a copy of the signed acceptance letter. This will give you a strong case for payment. If things get complicated, you should consider seeking legal advice so that an attorney can inform you of your rights and responsibilities.
  • Money problems. Sometimes, a customer will want to pay your invoice but WON’T be able to do so because they are low on funds. Unfortunately, this can happen to the best of companies. You should use your judgment when solving these problems. In many instances, offering a payment plan to your customer will solve the problem. If it doesn’t, you should consider seeking legal advice from an attorney.

And, what if you still have cash flow problems?

Lastly, what can you do if you customers have good credit and you follow good invoicing practices, but still have cash flow problems? Many times, small companies get into cash flow problems because they simply can’t afford to offer payment terms to their customers. This is common for small and rapidly growing businesses. One way to solve this problem is to use factoring financing. Factoring solves this problem by providing an advance on your slow paying invoices from commercially credit worthy customers. This gives you immediate liquidity that can be used to manage your business. As opposed to most conventional financing products, invoice factoring is relatively easy to obtain and very flexible.

Disclaimer: This article is provided for informational purposes only and does not provide legal or financial advice. Please consult an attorney or CPA if you require legal or financial advice.

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