Slow-Paying Clients: 5 Strategies for Dealing with a Difficult Accounts Payable Department

Dealing with a Difficult Accounts Payable

Slow-paying clients have always been a concern for small businesses, but the pandemic brought concerns to a whole new level. While most small businesses have net 30 payment terms, around a quarter are now waiting 20-30 days past the due date for payment, according to a recent YouGov survey. Moreover, nearly one-third believe delinquent payments are putting their business at risk of closure.

If your business is dealing with a difficult accounts payable department or struggling with slow-paying clients overall, these five strategies will help.

1. Have Customer Credit Policies

Each time you allow a customer to pay after goods or services are delivered, you’re extending them credit. Unfortunately, many businesses don’t look at it this way and extend everyone the same level of credit or don’t have policies in place to determine who qualifies for which terms. Begin by creating an established policy that includes the items outlined below.

Who Sets the Policies

One person on your team should be responsible for setting credit policies and maintaining written documentation. Ideally, this person will work with the team to ensure all bases are covered.

How Pricing Overrides Are Handled

Sales teams are often allowed some wiggle room with pricing. However, it can cause billing confusion if there are no written guidelines on who can override your regular prices, to what degree they may override them, and how overrides are documented.

How the Extension of Credit is Handled

Your policy should include who on your team determines the creditworthiness of each client, including how much credit each client qualifies for and how long they can wait to pay.

The Full Approval and Denial Process

You must have a standardized way of assessing credit risk, as all accounts should be handled the same way to avoid legal concerns and minimize the risk of bad debts.

Policy Review Plans

Documentation should include when the policies will be reviewed and who is responsible for evaluating and revamping as needed.

Training

Everyone on your team will need training on your policies to ensure they’re applied in a uniform way. Map out your training process and keep a written log of training dates.

2. Ensure Customer Data is Complete and Accurate

Incorrect information can result in billing and payment delays, so customer data should be confirmed with each order. Your CRM or order management software should also include the terms for each customer, including the total allowable balance they’re allowed to reach and any relevant payment terms.

3. Implement an End-to-End Electronic Invoice and Billing System

Going digital is essential in the modern age. For customers, this means having access to an online portal where they can view and pay their invoices when it’s convenient for them—without having to speak to an agent. They’ll appreciate it and likely pay faster.

For the business, using an electronic system is priceless. You can automate repetitive tasks, eliminate manual entry and the errors that come with it, and free your team from having to manually process each payment.

It’s also a good idea to reevaluate your invoicing process. Many companies only send batch statements at the start or end of the month. If you switch to sending an invoice immediately after goods or services are delivered, cash flow naturally improves. You can also try billing in advance. Many clients will agree to pay ahead of time in exchange for a slight discount. 

4. Create an Airtight Collections Process

Once you’re set up with a digital billing and invoice system, collections become much easier too. For example, you can automate reminders to pay, so it’s easy to let clients know when their due dates are approaching and when they’ve missed a deadline.

Just as you’ve set up processes for determining credit and billing, you’ll want to set up collections processes too. These should include the items outlined below.

Billing Intervals

Consider the full timeline, including initial invoices, notices to indicate payment is due soon, and overdue notices.

Payment Plan Requests

Sometimes even customers who traditionally pay on time will request a payment plan. Having a written policy is good for customer relationships and can help ensure you get some of the cash trickling in. These types of arrangements are typically best handled by an accounting department, as an accountant will be in a better position to map out a plan that benefits your company without letting emotion creep in.

Interest Accrued for Delinquent Accounts

It’s common for a late-paying customer to pay interest or fees on overdue invoices. Identify what your charge will be and ensure it’s properly documented and shared with customers. The latter will increase the likelihood of timely payments and cover your expenses for overdue ones.

Discounts for Early Payments

Businesses can often speed up payments by offering a small discount for early payments or pre-payments.

It’s worth noting that more than half of all small businesses believe their delayed payments are deliberate, per the YouGov survey. Using a mix of late penalties and early payment discounts discourages this practice.

When to Work with Debt Collectors

Determine in advance when it’s appropriate to hire a collection agency. Many work on a contingency basis, meaning they don’t get paid unless they collect from the customer. However, some have fees that can exceed the balance if it’s small, so you’ll need to identify the right criteria for your company and current setup.

When to Leverage Invoice Factoring

You may also want to incorporate invoice factoring into your collections process. Using this method, your invoice factoring company advances you most of the value of an invoice right away and then waits for payment from the customer. You’re able to use the cash in whatever way benefits your business most and the client can benefit from more relaxed terms. Working with a full-service factoring company like Charter Capital can help bridge some of the gaps in your technology and processes too, as you can benefit from free client credit reports and receive free collections services. That way, you can make more informed decisions about extending credit and are freed from chasing payments too.

5. Have Effective Tracking and Reporting Systems in Place

Having the right data makes it easy to see if your current processes are working for you and where issues are occurring. A few KPIs to track include:

  • Average Days Delinquent (ADD)
  • Days Sales Outstanding (DSO)
  • Percentage of Current A/R

It’s also a good idea to track the habits of individual clients and set a threshold for the total number of allowable late payments. Because late payments cost your business money, there may be a time at which it simply doesn’t make sense to continue the relationship.

Reduce the Strain of Slow-Paying Clients with Help from Charter Capital

Charter Capital can provide you with same-day cash for your unpaid B2B invoices. We also offer perks like free customer credit checks and will follow up on invoices for you, plus have a digital invoicing system that makes processing a breeze. Best of all, most businesses qualify. Request a complimentary rate quote to learn more or get started.

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