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, 73% of businesses are negatively impacted by late payments.
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?
View Comments (86)
I have my own business. My husband does the invoices. On the invoice it says 30 days basically to be paid by. My husband put in 5 invoices got 3, 2 days before the 17th if last month. As if yesterday he did not sign or cut my 2 cks. The manager said once he does that I have to wait another 30 days. That's wrong! My question is what is the highest percentage u can charge for late fees and can the guy I'm working for fire me by charging him?
I have used a few of these tips such as setting up recurring payments, setting consistent deadlines and having a late fee. I also make sure to send reminders out (emails/invoices get lost a lot by certain clients), and that when I first get their email address, I make sure it's not their "junk" email (a.k.a. the account they don't check).
That's good advice! Thank you for sharing, Valerie!
Thanks for the tips, they are great indeed. I was about to get angry at clients for delayed payments but after reading these tips, I am motivated to do nice follow-ups.
You're welcome! We're glad you found the tips useful.
Most of my customers are large and we find that their accounting departments often lose paperwork or our payments get "lost" in their system. Our office manager spends a good deal of time following up on those and it often means that we have to resubmit invoices and proof of delivery. Eventually, they pay.
Our collection struggles are always caused by not policing the credit limit. We have some smaller customers and they run up a big bill which, for some reason, no one caught until it was too late. One of our current collection problems went as follows:
The customer went way past his credit limit and then COVID hit. Originally, we reached out believing that the pandemic would be short lived and told him we would wait until he re-opened his business. As we got deeper into COVID, I would send him emails for no other purpose than just to make sure that he was still around. When we finally opened, I put him on COD terms and asked him to try to make payments towards the outstanding balance. I even suggested $20 per week just to start. He kept buying COD but never made additional payments and continued to blame the pandemic. I then insisted that every time he came to purchase product that he make an additional payment towards the debt but I left it to him to determine how much extra to pay. After 4 months, he had paid the equivalent of $8 per week. I then asked him to sign a payment plan of $125 per week which I thought was very workable and the debt would be paid off in 6 months. He asked me to make them monthly payments of $500 and I agreed. He made one payment and then said that his debit card had been stolen. Finally, he called to place an order and I told him that I was uncomfortable filling the order and continuing to serve him even as a COD customer. It has been 3 months and we have not heard from him. I'm thinking Small Claims court but I am not sure if he is collectable.
Thanks for sharing your personal experience, Phil! We appreciate the comment.
I learned when I owned my own businesses that there really was no upside to collecting money you are owed. It requires action that you do not get paid for and thus developing processes like the ones described is of critical importance in a number of ways. Cash flow is one of the most important ones.
As a coach I always encourage my small business clients that if you are owed money for more than 30 days then you are in another business, the collections business. You need to develop an entirely separate system than you run your primary business on and in-turn change management hats when you switch back and forth between your 2 businesses. Very rarely have I seen anyone make money out of collecting their own debt. Most clients agree they do not want to be in the collections business. Therefore, we design processes and procedures to reduce and perhaps eliminate the need to be in the business.
Thank you for the comment, Richard! We appreciate your insights.
I work mainly with one large company. I didn't like their 45-day payment deadline, but I've adjusted to it. This is good information for the future. Just a word of thanks: This real time and relevant information is excellent. I look forward to more of it. Kudos on a job well done.
You're welcome, Michael! Thank you for the nice comment.
As mentioned anyone in photo and video business faces this. In my business I certainly have!
I learned to engineer my contract terms and policies to reduce the incidence of this because a collection dispute can destroy a client relationship. I also found that collection problems are far more likely to occur with a business or institutional client than a personal event client (wedding or social event). My most difficult collection issue occurred with a state agency n Maryland. They owned several thousand dollars and I finally collected by elevating the issue in that particular department.
For many products and services I use, I am required to pay at time of order or when the item is supplied. I do that with most clients now, but there are some who have such an excellent track record, and for them I don't even require a contract and collect on completion.
Thank you for sharing your personal experiences, Mark! We appreciate the comment.
One of the best publications. Thank you for your professionalism and dedication.
You're welcome, Miguel! Thanks for reading SBA!
We have found that late payments are not always due to customer issues or accounts payable rotating. In some cases the problem is on our end. PO# typo or some other incorrect information on the invoice. Their system might "kick" it back but not always notify the vendor (Which I believe is done purposely for their own cash flow reasons). They put it on their suppliers to submit a correct invoice. That's why it's crucial to make sure the invoice goes out correctly the first time and also (for the customers that conveniently do not let us know if there is a problem), verify they've received an accurate invoice before waiting 30, 60 or even 90 days after it is due. If that happens, some customers consider the original invoice as non-existent and will start the clock over once they receive the corrected one, thus making their vendors wait an additional x amount of days depending on their payment terms.
We primarily have returning customers, some of which tended to pay late. What worked well for us was writing a letter to include a table where we listed all our invoices, their due dates, the actual payment dates, and the number of days the payments were late. Our message was that due to the negative payment history and in the event of one more late payment, we would require a prepayment for all their orders over the next one year period. We had to practically implement the prepayment schedule for only one customer. The others made their adjustments instantly.
Thank you for the detailed comment!