Deflect the Risk
You need policies. Write them in a word document, print them out, follow them.
The simplest way to help reduce cash flow risk is to ask your customers to pay upfront; or at least submit deposits before work starts. You can have a plan to waive this requirement but operating under the assumption that new client work will require upfront payment should be the default.
When you risk losing customers if you don’t relent, then consider offering them outside financing. Both b2b and b2c companies can partner with a leasing or finance company to finance their customers. This does add additional friction to the sales process. Some finance companies are downright lazy when it comes to working with your clients, especially if they are at all difficult. They don’t care as much about getting the deal done as you do. Delays or even losing customers can be possible.
However, if you find a good finance company and you involve yourself in supervising and moving along
the finance process, you might see great success. Then you are paid upfront, never have to worry about defaults, and this entire problem is solved. It’s up to you to assess your situation if it’s worth it or not to incorporate outside financing for your customers.
Finally, there is the option of factoring. You take your unpaid invoices and work with a factoring company to essentially borrow the amount of the invoice. Most deals will go well, and you’ll have no cashflow issues. The trouble will be when the customer greatly delays payments or doesn’t pay at all. You’ll be on the hook to the factoring company to pay back that loan.
Know What You’re Getting Into
An ounce of prevention is worth a pound of cure.
We are hungry for business, and in general, it makes sense to take the risk of giving payment terms to customers. It keeps you busy, and most of the time it works out. However, if customer non-payment, delays, and cashflow wasn’t an issue, you wouldn’t be reading this book. The fact is, you likely do have cashflow problems that you would like to solve ASAP.
The time to solve them is at the beginning. For any customer who is not willing to pay upfront, shift your thinking. Consider that you are giving this client or customer a loan. You’d be a terrible loan officer if you did zero due diligence on your borrower.
Have your customers fill out a formal ‘Internal Credit Application’ for the payment terms. Do the due diligence. This could include paying for D&B, Hoover or other business credit worthiness reports. You could even run credit reports on the top level decision makers at your client’s business.
Hired Guns
Let’s fast forward a week from now. You’ve written up formal policies. You’ve adopted some of your favorite ideas from this book. You’re making more customers than ever pay up front; pay partial deposits, get outside financing, sync payment terms with your obligations, you’re making us of Merchant Cash Advances or Invoice Factoring. However, you still have non paying clients from the past. Occasionally an invoice factoring deal goes bad. Perhaps you slipped and didn’t want to let a customer walk out the door, so you threw your internal credit policy manual out of the window for this particular customer, and the payments never came.
In other words, when push comes to shove, what are you going to do?
Refer to your written and printed “In House Collections Manual” of course. You’re going to write that tomorrow, right?
Having a formal, clearly specified, step-by-step checklist of in-house collections actions is the first step of how you respond. These checklists can look something like this.
Day 15 – Payment Reminder via Email
Day 25 – Payment Reminder via Email
Day 30 (Due Date) – Payment Due Notification
Day 32 – Phone call reminder
Day 35 – 2nd Phone call reminder
Day 37 – 3rd Phone Call reminder
Day 40 – Send out bill in mail
Day 47 – Send out firmly worded bill in the mail
Day 52 – Final phone call reminder
Day 54 – Send out final payment reminder and advise that bill will go to collections.
Day 60 – Report to credit bureaus, send to outside collections partner.
Collections Partners
There is an entire industry built around collecting your outstanding bills. Many will even appear as ‘in-house’ with your letterheads, email headers, or present themselves as with your company on the phone. There are different billing tiers for this type of service.
Make sure that any collections agency you work with has the proper license for their State, or simply work with a business law firm.
Out of House Collections
From 60 days to 180 days past due, things will look dire. You certainly needed your cash a long time ago, but now it is a big ‘maybe’. Thankfully, collection agencies are geared up to collect during this time period and don’t charge for hourly work.
The vast majority will charge a contingency percentage of whatever is recovered, but a few might charge a small flat fee per account and conduct guaranteed collections activities on each account.
Your hope should be that they refine their communications to produce more recoveries, and you need to ensure that the collections agency is in full
compliance with all regulations. If they break any compliance codes, you could be dually responsible for their actions.
Working with a business law firm is a safe bet. Those with collections programs will often try ‘soft collections’ first, which can replace a collections agency entirely.
The tone of the conversation is different between a collection’s agency and a lawfirm.
After a certain amount of days of non-payment, you are looking at a law firm anyway. After a certain number of days (90 to 121) it is clear that the customer didn’t just forget. You’ve reminded them dozens of times through email, phone, and mail. A collections lawfirm at this point will send a legal demand letter.
Either your customer responds and attempts to negotiate, hires a lawyer to negotiate or claim the debt is invalid, pays, or ignores the letter. The next step is that your lawfirm files a lawsuit on your behalf. If all goes well, you’ll have a court judgement that will allow you to forcibly collect what is due, including attorney and collections fees.