Taking the leap of faith and starting a new business is always challenging and exciting times. Earning the first sale and gaining new customers are all part of the journey in creating the business of your dreams.
Depending on the industry a new business operates in, sometimes it is expected to perform services or provide product on credit.
Most customers will pay on time without any fuss or fight but occasionally customers will fall past due because of financial hardships.
Understanding the actions to take to reduce the amount of past due paying customers and how to collect from customers when they have fallen past due is essentially for improving cash flow for small businesses.
Below are some simple tips that will decrease the chances of a delinquent paying customer.
- Invoice Smarter– When sending an invoice to a customer, clearly outline the payment due date and late fee’s involved if payment is late. Send the invoice quickly after the service or products have been provided so the customer will help reduce late payments.
- Enforce Late Fees– Allowing a customer to pay late without repercussions sends a message to customers that a business isn’t serious about getting paid on time. Always enforce the late fee that wasn’t clearly explained when the customer was invoiced.
- Follow Up– After a service has been performed for a customer, following up helps get feedback from a customer and ensures the customer is happy. This is always a great time to remind the customer of the payment due and try to collect a payment at this point.
- Express Urgency– If a customer does not get an invoice quickly or never receives a phone call after the transaction is completed, they will rightly assume the business is not concerned when the payment arrives. Create a system that allows the business to invoice faster and follow up customers automatically.
If a company has sent invoices but the customer has refused to pay and is not responding to calls or letters, then the next move is to hire a debt collector to collect on the payment dues.
Using a collection agency may seem complicated and companies research how to hire a collection agency but it is actually a very simple process.
Most reputable collection agencies will work on a contingency rate. This simply means the collection agency will only get paid a percentage of what money they are able to successfully collect.
The rate will depend on the industry, age of debt, and the amount of debt owed to the company.
For example, let’s imagine you run a small HVAC company and have three customers who owe a combined $2,000. The customers have refused to pay and they are now several months past due.
The collection agency may offer a 30% contingency rate. The HVAC company will accept the rate and hand over the past due accounts to a collection agency.
The agency works hard for several weeks but is only able to recover a total of $1,200. The agency will keep 30% of that $360 while the HVAC Company gets the remaining $840.
The HVAC is thrilled to get some money back while the agency has gained extra revenue and new client they can represent in the future.
Using a debt collection agency to recover the money owed will allow employees to focus on the normal day to day task of the business that helps grow a company rather than trying to collect on past due customers.
While giving up a percentage of the money owed to a business is never an easy decision, remember these customers were not paying before the agency utilized its tools and experienced debt collectors to recover the money owed.
The best part about hiring a collection agency on a contingency rate basis is if they are unable to collect any money then you are owed nothing in return.
As a business is growing from a side hustle into a full-fledged business, growing pains are going to occu naturally. Hopefully the tips above will help any small business owners avoid past due customers and give them a plan on action to take when they do encounter one.
Bio: Author Luke McCann has worked in the collections industry for decades and now runs CollectionAgencyMatch.com helping small businesses recover money owed.