Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
As the economic recovery limps along, a growing number of companies are discovering that customers who have always been able to pay on time are having trouble paying their bills and staying current. Others who may have been slow payers are falling even further behind or are unable to pay at all.
To keep cash flowing through your business, it's often a good idea to offer payment plans. If you have customers that can't realistically pay in full and you don't offer a payment arrangement, you may not get paid. Offering payment options will get you your money, though the process may take place over a given amount of time. It might be your best option to keep your existing customers, get paid and stay in business. Establishing payment arrangements is a two-way street; you create the rules and your customers have to play by them if they want to do business with you. It is up to you to be fair, reasonable, and not intimidating.
You only need to set up payment arrangements if a customer cannot make payment in full. You must always do this by talking with the customer, and then you must follow up by sending a written notice or letter reiterating what the arrangement is. The only way to make this work is to be very specific. The first line of your letter should say something similar to, "As per our conversation today (date)." Then you can go into detail on the terms to which you agreed, the total due, the number of payments, and the due date and amount of each payment. I cannot stress enough that you need to be very specific and detail oriented. It's even better if you can include a payment envelope.
Never start a call with a customer by asking how much they can pay; this will just set you up for failure. You must let the customer know how much you can accept in order to remain in control of the call -- not the other way around. Once you ask the debtor how much they can pay, you lose all negotiation ability as well as control of both the call and the situation. It is essential to communicate confidence when you are speaking to past-due customers, and remain relaxed, self-assured, and prepared.
When you're setting up each customer with their specific payment plans, decide how many monthly payments you can extend to the customer, and then divide the total amount due by the number of months you want the balance to be paid in. This will be the monthly payment. Make sure that you put the payment arrangement with any customer in writing. Let the customer know that if they cannot make a payment they must call you and let you know. They can't just skip the payment because this could void the agreement. This will keep the lines of communication open while helping your customers stay on track and keeping some cash flow through your business.
Accepting whatever customers offer as payment without any negotiation is a huge mistake that can cost you the customer, money, and business. Business owners need to maximize in-house receivables, and they cannot get a handle on these without assessing the situation and negotiating a payment plan that works for them and the customer, and which is also beneficial to all involved.
You have to make payment arrangements that are both worth your while and feasible for the customer. If you work with each customer to assess their specific situation and agree on a certain amount and schedule that the customer can realistically achieve, you'll increase the likelihood of getting paid.
Specific steps for successful payment arrangements are:
- Ask for payment in full.
- If the customer cannot pay in full, offer to split the balance into two payments with specific due dates.
- Gather information on the customer's financial status.
- Ask open-ended questions that allow you to evaluate the situation.
- Suggest weekly or bimonthly payments, as opposed to the common monthly payments. This will give you more money per month and allow the debt to be paid off more quickly.
- Come to an agreement that is beneficial and realistic for you and your customer.
- Get a commitment and document it.
- Send the customer a letter reiterating your understanding of the agreement.
- Ask for a signature on that agreement.
Always start off by asking for payment in full. Then, go down from there. Always aim high, such as first asking for 100 percent, then 80 percent, then 75 percent, and so on. If you leave it up to the customer, they are likely to offer the lowest possible amount, which probably won't help your situation at all, and it certainly won't help them. Try to get as much as you can as frequently as you can. Remember to:
- Send a confirmation letter the day you make the payment agreement with your customer.
- Send a payment reminder 10 days before the payment is due.
- If you do not have the payment on the due date, send a letter informing the customer that they have five days to pay before the arrangement is revoked and they go back to full collection efforts on the full amount.
Something else to consider with another business: Could you start a barter relationship with this customer? If they offer a service or something else you could use in your business, think about making a barter arrangement to clear up the past-due balance.
Negotiation is a key skill that anyone who is trying to collect money needs to develop. Even if you agreed upon an amount at the time of the sale, you may have to negotiate later if payment is not made.
This article is an edited excerpt from The Guide to Getting Paid: Weed Out Bad Paying Customers, Collect on Past Due Balances, and Avoid Bad Debt (John Wiley & Sons Inc., 2011) by Michelle Dunn.