What tactics do you take with business partners who are slow to pay balances due?

One important element to this should be considered, what initial credit management is done when considering credit? When a company offers credit terms to a customer, the business is making an interest free loan to that customer. The company is now a lender. What precautions are taken to determine that the customer has good credit (that a bank would lend to them)? When a customer does not pay on time, you become an unwitting investor in your customers business. Your money is going to help them grow their business.

Be careful of: "Anybody with bad credit will buy anything"

Extending credit is like offering money to a person that you don't know. Yet many business owners have little clue how to evaluate the credit worthiness of a customer.

In general, how a company pays their other vendors will be similar to how they pay you. So in the credit extension process, you need to find out how they are paying others. D&B is a good place to look. Further, you can ask for bank and trade credit references and call them directly. Be sure to ask pointed questions. If others are not being paid promptly, this is a message for you.

Once you have extended credit and the customer does not pay, you are no longer in a good position. If you have made a one time sale, there is little incentive on the part of the customer to pay you promptly when they don't need more merchandise from you. The guideline then is that the "squeaky wheel gets the oil." This means that if someone if not paying you, you must be aggressive in calling them for payment. Otherwise they are likely short of cash and are paying others that are calling them frequently.

Sometimes, you can do profitable business with a company that is slow pay. Often, you can add a little to the price knowing the customer will be slow. But be sure that the slowness is "policy" rather than illliquidity. Many firms keep buying right up to the day of their bankruptcy believing that the decision to accept goods and services when they have no capacity to pay is the vendor's fault for being stupid.

Finally, keep in mind that the customer will not be shy in asking for faster shipment, price concessions etc. So you should not be shy in asking for money. When you have shipped the goods, the customer's responsibility is to pay. If they are not paying, this is a sleazy tactic and should teach you about human nature and good business practices. You must aggressively collect; phone calls are the best tactic. You should document in a file all phone calls made and what you were told. This is important in credit followup.

Kate, I agree with each of the above responses. I offer the following additional suggestions that have worked well for our clients.

1. As stated above, know the customer. We all love making the sale, but we too frequently overlook that making the sale is only half the battle. Get to know your customer well before ever selling to them. Credit references are a good way to get an idea.

If you have a good relationship with your banker, they can be most helpful in providing you with information about the customer. They have access to all sorts of industry and company information. Your banker will also appreciate the fact that you are being diligent about the collections process and should be more than willing to work with you.

2. Talk with the customer and lay out your expectations. You deserve to be paid on time, you should expect to be paid on time. Let them know this right up front, point blank. This sends a strong message to them right out of the gate that you EXPECT to be paid within the terms you set out.

3. Set payment terms that meet your needs. Clearly state the terms on every communication you have with the customer.

4. Demand payment up front for the first order or two. If they are serious about your product or service, this should not be a problem for them. If they balk, that is a red flag and maybe you should not do business with them. Don't waiver from your decision. As I said, if they are a serious customer, they will ultimately agree. If not, you just saved yourself a lot of hassle trying to collect.

5. Offer incentives for paying early such as a discount for paying within 10 days. Before you do, set out the terms clearly. A typical discount is 1 or 2% off the invoice for paying in 10 days. Here is how it would work.

You sell something at a face value for $1,000. Your customer normally pays in 30-45 days. You offer a 2% discount for paying in ten days, otherwise the full invoice value is due in 30 days. The customer would pay you $980 in 10 days. It would cost you $20.00. However you get $980 20-35 days earlier than you otherwise would.

The benefit to the customer is that they earn an equivalent annualized rate of return of approximately 18%. This will vary somewhat based on the actual terms you offer but no one can get close to earning 18% annually by paying a few days early.

The key here is to consistently communicate the benefit of paying early to the customer.

If you were to add an additional 2.25% to the price you charge the customer then give them the 2% discount, it actually costs you nothing but you get prompt payment.

The above example is somewhat simplified but the principle is the same.

6. Take deposits, demand a 50% deposit prior to shipment with the balance due within your terms. Again, the customer may balk, if they do then maybe they should look elsewhere. Worst case here is that you have at least collected half the order up front.

7. Accept credit, debit and corporate purchasing cards. If it is appropriate for the industry, this gets you paid immediately.

8. As Rick states. "The squeaky wheel gets the money". Be professional but persistent. The customer will soon tire of your calls and pay you to get you off his/her back.

9. Prepare a "collection" letter and be prepared to mail it if your phone calls do not produce payment within two weeks after your last call. The collection letter should spell out that if you aren't paid within (X) days, you will turn the account over to a collection agency and that you will report them to the Better Business Bureau. This produces some surprisingly good results. However, it is advisable to discuss the issue with your lawyer to make sure the letter is in compliance with the law.

10. Finally, last but not least. Set up a system with your lawyer where he prepares a standard form legal letter on his/her letterhead stating that he/she represents you in attempting to collect the obligation and that if payment isn't made within (X) days he/she will commence legal action to collect.

The last thing one wants to receive is a letter from a lawyer. It takes very little of your lawyers time to send the letter and you would be surprised at the results, if you have to go this route.

If I can be of further assistance, just shout.

Chris

Collection starts with the Intake process. My contract with clients mentions payments and policies. Creating a system and process with forms on what to do and when is very important.