How to Collect Overdue Bills From Good Customers

Business.com / Financial Solutions / Last Modified: February 22, 2017

How to collect overdue payments from quality customers without damaging a good business relationship.

You’ve got a good customer, or maybe several good customers, who aren’t paying on time. These are “good” customers despite the payment problem because they’ve placed significant orders with you in the past, and may do so in the future, and they generally make good on their debts. We’re not talking about the true deadbeats who don’t intend to pay you and leave you no recourse but legal action.

These otherwise good customers have fallen behind in payments because they are:

  • Holding onto their cash because there is no significant penalty for not paying their bills on time.
  • Experiencing genuine financial hardship, such as cash-flow problems.

When a customer doesn’t pay on-time, your business can experience cash flow problems of your own. According to PaySimple, the Bureau of Labor Statistics found that 53% of small businesses rank cash flow as their top business challenge. In the same article, PaySimple also cites a study by the National Federation of Independent Business, that “shows that the small business receivables cycle has grown 30% to 48 days over the last five years.”

What should a small business do to get paid while maintaining a positive working relationship?

Collection Policies for Small Businesses

First off, it depends on whether the customer lacks the incentive to pay on time, or is truly having difficulty doing so. It’s one thing to submit an invoice that says payment is due within 30 days. It’s another to spell out—and enforce—the consequence of not paying within 30 days. Ensure your payment policy:

  • Specifies an interest charge for overdue balances. How much this amounts to is state regulated. Check with a business attorney to determine what you can legally charge in interest fees.
  • Charges a fair returned check fee. Charge at least enough to cover what the bank charges you for the bounced check, plus add a similar amount for your time and inconvenience. Fees for a returned deposit item range from $5 to $35.
  • Includes purchase order text that makes the buyer responsible for collection charges. Note in writing that the delinquent customer will be held accountable in the event of any collection or other legal fees incurred to secure payment.
  • Offers a discount for on-time payment of bills. Sometimes a carrot works better than a stick. Offer a discount for quicker payment, e.g., within 5 days.
  • Set up electronic billing, preferably with a secure online payment capability. This eliminates the “We misplaced it” or “We never got it” excuse. Online billing service FreshBooks says adding electronic payment options speeds up payments by eight days, on average.
  • Set up recurring billing, so that a customer’s credit card or bank account is charged automatically every month for whatever charges incurred. Yahoo Business Advisor Patrick Jones claims this as the easiest way to get customers to pay on time.

A written payment policy detailing specific penalties and incentives won’t necessarily eliminate late or delinquent payments. It will, however, eliminate those customers who like to “game the system” if there’s no real penalty for paying late.

Related Article: 11 Entrepreneurs Share Their Best Billing Automation Tips

Tips for Collecting from a Good Customer in Financial Difficulty

When good customers aren’t paying their bills, it’s important to find out why. You don't start by threatening legal action or being threatening. It means taking some of these rational steps.

  • Monitor your customers' payment habits. You should be able to quickly identify those who need quick reminders when their bills are overdue. If your terms are 30-day, and your good customer always pays in 60-days, then you probably shouldn't use collection procedures until they go past their normal cycle.
  • Adjust the billing cycle to increase on-time payments. Sometimes it's just a matter of sending the bill mid-month instead of at the end of the month. You can limit the size of a customer's order, or you can put a customer on C.O.D. before you start collection procedures.
  • Phone the slow paying customer. Making direct contact with the person who handles accounts payable is the most effective way to collect on overdue accounts. Sending bill after bill quickly becomes a waste of time and energy.
  • Work out a payment schedule. If the customer is having problems paying you, chances are the customer is having trouble paying others. A payment schedule at least puts you ahead of those who just wait it out. It also provides customers with some sense of relief that the matter can be resolved and you are someone they can work with. When these customers return to better financial footing, you’ll have earned some loyalty that might pay off.
  • Follow up quickly when payment is later than expected. When a payment is past due, send a reminder or make a phone call. Sometimes the check really does get lost in the mail. A timely follow-up can fix problems like a lost invoice or check.
  • Consider settling the bill to save the account. Sometimes, it's better to let a small bill go -- or split the difference on a disputed bill -- rather than lose the account. At one point, Amazon owed Ten Speed Press over a million dollars. Amazon asked to lengthen their payment terms and Ten Speed Press refused. Amazon immediately removed all Ten Speed Press books from the website. The lost revenue was so painful that Ten Speed Press quickly consented to Amazon's slow-pay terms.
  • If all else fails, consider using a collection firm. Give the customer one last chance to make full (and immediate) restitution. Otherwise, consider turning the account over to a collection agency, so someone else can be the heavy. Collection agencies usually take a 25-50% cut of what they are able to retrieve. Half of something is better than half of nothing.

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