Late Payments Are Crippling Small Businesses. Use These Strategies to Collect Your Money Sooner.

To keep late payments from happening, you need to learn how to prevent them in the first place. Here's how to protect yourself and get the money your business rightfully earned.

learn more about Jim Conroy

By Jim Conroy

Opinions expressed by Entrepreneur contributors are their own.

If your customers are paying you late, it's like giving them an interest-free loan. If the payments are late enough, you start to wonder whether you will be paid at all. Then you have to take time away from earning more money to chase what's owed to you. Because whatever you did — which may have included working extra hours or hiring extra people — you still must pay your vendors. Worse, if you're delaying payments on your bills, you put your own vendor relationships at risk as well as your credit rating.

According to a survey by YouGov, 59% of small businesses have experience with late payments. The pandemic has only exacerbated this problem. About one-third of small businesses in the U.S. say they're at risk for closure because of it. But unless you convert your accounts receivable into cash, your business can't operate, whether it's paying vendors, acquiring assets or adding staff.

Related: What Is The Impact Of Late Payments On Your Business's Sustainable Growth?

What to do in advance

You can optimize cash flow by reducing the period of time between completing a project and receiving payment for it.

  • Collect a deposit. When you accept the job, explain that you'll need a portion of the expected final invoice in advance. This may be easier when the customer knows you'll need to obtain raw materials or hire additional staff. Be clear about all aspects of the job: when you'll deliver all or part of it, when the final invoice will be issued, and when payment is due.
  • Invoice in advance. Even if you're not asking for a deposit, invoicing in advance with all terms (such as the due date and late fees) makes your expectations crystal clear.
  • Credit checks. If possible, conduct a credit check of the business or individual in question. This will incur a cost, so you may want to reserve this for business that will be significant. Then you can negotiate your payment terms around the results.
  • Make a contract. Sometimes a handshake isn't enough. Detail the scope of work, when work is to be completed, when payments are due and any late-payment penalties (including legal steps in the case of non-payment).
  • Ask for payment when it's due. If you've agreed on a date (say the first of the month), don't delay asking. Get in touch with your customer the first day it's late to discuss the missed payment. The earlier, the better — 94% of current debts are collected, but collection rates drop to only 74% for balances that grow to 90 days outstanding.
  • Digitally track your invoices. Create your invoices in an app that tracks them so you'll know when they're due. Some apps also enable payment directly through them, even without charging the traditional ACH fee.

Related: Late And Failed Payments Are Just Another Pandemic Symptom For Businesses. Rethinking Payments Is an Easy Remedy

What to do when the customer is late

When you must reach out to the customer, lead with an email. Make it cordial, but direct. Make it easy for the customer to respond by attaching a copy of the invoice and reminding them of all the ways you accept payment. You can even mention that you're available for more work.

Make the subject line work for you. Include how late the payment is with every email. Don't just forward and build on the first one. Keep the tone friendly. Write as often as seems prudent — at least weekly, more often if the client owes a large amount or if you fear the client's ability to pay.

Call after a month if emails haven't worked

If you haven't received a response to your emails, escalate your collection effort. Call the customer. Confirm that you're speaking with the right person to handle payment, introduce yourself and say why you're calling. Be friendly, but firm. Don't get emotional and raise your voice. Don't use sarcasm. Then move the conversation to the agreement you and the customer made. Have them repeat what the terms are and confirm their intent to pay. Immediately after the call, send another email summarizing the conversation and clearly stating the next steps.

If you can't reach the customer by phone for any number of valid reasons (they're in a meeting, your number shows on their phone as "unknown" or they've been traveling), try a text or even a direct message on Instagram, Twitter or Facebook. Some people pay more attention to their mobile phone and social media than email. Be polite still, but firm.

What to do when the customer is really late

If the customer is really late, you have three successively unappealing steps. Before taking each, connect one more time through the most effective means (email, call or text), because any or all of the below options can end your relationship and the chance to earn future money.

  1. No more work. Tell the customer you can't do any further work without payment, then follow through. Stop access to any shared documents or brand assets if your contract permits.
  2. Collection agency. After two or three months, consider a collection agency. For 20% to 35% of what you're owed, they'll do the legwork. Be prepared with records of the transaction with the customer, including the invoice, contract and a description of the work provided, as well as all communication attempts in pursuit of payment.
  3. Legal action. This will be protracted and potentially expensive if your contract doesn't permit you to recoup legal fees or, if, for some reason, you lose the case (for instance, if your records are not good or your terms can't be documented to the judge).

Related: Entrepreneurs: Here's How To Make Sure You Get Paid

The best way to avert late payments is to prevent them

There are a lot of reasons you may be reluctant to take definitive steps to collect money owed to you. You may fear fracturing the relationship with an established customer or you may fear losing the opportunity to secure more profitable work from a new customer. Sometimes there are even personal reasons if you're doing work for a friend or relative.

In the end, your business depends on keeping cash flowing. When you aren't paid, or you get paid late, you've wasted time and money. Keeping your business healthy is your most important goal, and adopting these practices will go far in ensuring that goal.

Jim Conroy

Entrepreneur Leadership Network Contributor

CEO

Jim Conroy has spent his career helping small businesses. At The Neat Company, he held accounting and finance roles, most recently as CFO and now CEO. In the last 12 years at Neat, Jim has served the needs of the small business community as a backend business management tool and partner for growth.

Related Topics

Editor's Pick

This 61-Year-Old Grandma Who Made $35,000 in the Medical Field Now Earns 7 Figures in Retirement
A 'Quiet Promotion' Will Cost You a Lot — Use This Expert's 4-Step Strategy to Avoid It
3 Red Flags on Your LinkedIn Profile That Scare Clients Away
'Everyone Is Freaking Out.' What's Going On With Silicon Valley Bank? Federal Government Takes Control.
Leadership

How to Detect a Liar in Seconds Using Nonverbal Communication

There are many ways to understand if someone is not honest with you. The following signs do not even require words and are all nonverbal queues.

Business News

A Retired Teacher and Her Daughter Were Scammed Out of $200,000 Over Email: 'I'm 69 Years Old and Now I'm Broke and Homeless'

The mother-daughter duo was in the process of buying a townhouse when their email chain with the title company was hacked.

Business News

Twitter's PR Department Is Now Automatically Replying With a Poop Emoji

Musk's ongoing battle against the media seems to have taken a rather undignified turn.

Leadership

Your Workplace Habits Need a Good Spring Cleaning, Too. Here Are 5 Steps to Get Started.

When was the last time you did a good spring cleaning on some of your unhelpful repetitive behaviors at work?

Leadership

How Great Entrepreneurs Find Ways to Win During Economic Downturns

Recessions are an opportunity to recalibrate and make great strides in your business while others are unprepared to brave the challenges. Here's how great entrepreneurs can set themselves up for success despite economic uncertainty.