A small business’s cash flow is, not surprisingly, dependent on cash. That’s why late-paying clients can be an incredibly frustrating challenge for a small business owner. It not only ties up money you need to pay your own bills — trying to get clients to pay can become a real time drain. In fact, a 2017 study found that small business owners spend an average of 1.3 days a month chasing down money that’s owed to them.
Here are five of the best ways to deal with late-paying clients.
1. Remember That You Deserve That Money
Nobody likes to feel like a pest. Nor do most people enjoy having to ask someone to pay what they owe. That’s why many small business owners can struggle with late-paying clients. After all, when looking to pursue your passion and dreams, hounding people for money probably wasn’t on the top of the list of things you imagined doing. But here’s the thing: Asking people to pay up is part of your business. And one of the most important steps to getting late payers to give you money is adjusting your state of mind.
Always remember this: You should never feel bad asking for money you’re owed. You worked hard for it. You deserve it. They’re the ones who should be feeling bad. Not you. If you have provided a service to a client, it’s no longer their money. It’s your money. Let this thinking become second nature. If you need some help doing that, adopt “I deserve this money” as a motto you silently whisper to yourself whenever you’re about to send a follow-up email. Or, write the words on a sticky note and post it on your computer so you can see it. Soak them in until you never feel bad about following up on money again.
2. Establish Clear Payment Deadlines
One way of contending with late-paying clients is to establish immovable payment deadlines in a contract that clients will sign before you start work. While 60- or 90-day deadlines are common, don’t adopt them just because others do. Determine what deadline you want based on what your cash flow needs are.
Does a 60-day deadline risk throwing off your own monthly payments — whether it’s for rent, cloud storage, or insurance? Then request a 30-day deadline instead. Or even 14 days if that works best for you. Always pick a timeline that suits your business needs. Then make it ironclad in a contract. That is especially important in case — knock on wood — collection services or legal processes become necessary.
Now, it’s worth mentioning what you should do if a prospective client balks at your timeline. First off, this may actually be a useful red flag. But, if you feel the client is legitimate, or worth being flexible for, feel free to negotiate. Just make sure whatever compromise you reach still suits you, and is set in stone with an updated contract.
3. Adopt Early Payment Incentives and Late Payment Penalties
Since we’re talking about contracts, there are several things you can do to discourage — and protect yourself from — late payments. First, consider offering a financial incentive for quick and early payment. If a contract’s payment deadline is 30 days, offer a small discount (up to 5%) for those who pay within 14 days. If you’re hesitant about forfeiting that revenue, think of it like this: That discount is well worth the cash flow peace of mind it provides — plus, you’ve saved the hours you would have spent following up.
The second clause you could put in a contract is a late payment penalty. You’ll have to decide on the percentage and timing, but be careful about going overboard. Penalties can be a double-edged sword. Yes, it’s a means to ensure you’re either paid on time or paid for the inconvenience of having to wait. But it can also instill resentment. Nobody likes being penalized. It’s worth remembering, too, that, ideally, instituting a late payment penalty is meant to be more of a deterrent for anyone to pay late, rather than being an actual penalty you then have to collect.
4. Automate the Invoicing and Follow-Up Process
If you have late-paying clients, you’ll become very familiar with following up. This can be a time consuming chore, and one you don’t really want added to the million balls you’re already juggling as a small business owner. That’s why you should consider using an accounting solution like FreshBooks, QuickBooks, or Xero that can automate invoicing and follow-ups.
Most programs not only send invoices, but they also can be prescheduled to send out reminder emails on late payments. They’ll do what they’re designed to do, which will free you up considerably to focus on more immediate tasks your small business requires. Many accounting programs also allow clients not just to see invoices, but also submit payments.
Consider pairing this tip with setting up additional payment options like PayPal or Bill.com to make it that much easier for customers to act on the reminders they’re getting.
5. Never Get Angry
Considering how dependent your small business is on cash flow, late-paying clients can make it very easy to not just tear your hair out, but also to get angry at them. After all, they’re negatively impacting your business, right? And yet you need to do your best to never unleash your inner Hulk. That anger will only hurt you.
As much as the above tips will help minimize late payments, the truth is that they are a common part of doing business. A Xero study found that more than one-third of customers pay at least two weeks late. So if you get angry every time it happens, you may very quickly burn through clients you don’t want to lose. It’s worth remembering, too, that not all late clients are bad clients. That may sound counter-intuitive, but it’s true. After all, back in the days of video rental, who among us didn’t sometimes bring back a video late — despite the best intentions?
That’s why you need to maintain a cordial relationship with even late-paying clients. Don’t send angry messages. Send friendly and personalized ones. You especially want to do that with clients who aren’t chronically late. You never know what problems they’re dealing with on their end. Maybe their accounting department is undergoing heavy turnover. Perhaps something has gone wrong with their bank. Sometimes two months of late payments can be an anomaly.
If you keep your cool, the patience and goodwill you generate can benefit you greatly once the problems go away and a client becomes reliable again with their payments. They’ll appreciate your understanding, and your business relationship will be deepened.
How about you — are late invoice payments hurting your business? What tips can you share with other small business owners looking to deal with late-paying clients?