Debt can send your business into a financial black hole, making it vital that your customers pay and do so on time. It may be uncomfortable having to repeatedly ask a customer to pay, but what choice do you have? There may be no other way – other than legal intervention – to get your money.
In this article, you’ll learn some tips for improving debtor management. Sometimes, prevention is better than cure, but there are also solutions in case the former fails. We’ll also answer some frequently asked questions on the topic.
Tips for Improving Debtor Management
1. Use E-Invoices Instead of Paper Invoices
Mailing paper invoices can be slow and take days to arrive, costing you valuable time. In this day and age, many customers prefer to receive electronic invoices instead. This is a convenient method, especially for online businesses.
Since you’ll be operating online most of the time, you’ll find that e-invoices are more effective (except for certain industries and fields). Your customers will get e-invoices promptly, especially if you send them via email.
Holidays and emergencies tend to slow down the snail-mail process, but emails aren’t affected by these events. The sooner your customer gets an invoice, the more likely they are to pay. Instantly sent e-invoices help them remember to pay.
Of course, should you use an email service to send out your invoices, make sure you send them to the correct email address. If not, your customers won’t receive the invoice, and they might not know they owe you money. This will set you back financially and possibly necessitate fees for late payments.
2. Have Clear Payment Policies
Always make sure your customer payment policies are clear and concise. On the invoice, you can include some terms and conditions. Make sure they’re easy to read and don’t have ambiguous sections.
A clear payment policy will decrease the likelihood anyone has room to avoid payments through technicalities or ambiguity. The clearest terms have little room for error.
Even if your payment terms are clear, there are times when customers need extra explanations. Include a step that allows them to consult someone for payment clarification and assistance.
You should also add a step to let customers show they understand and accept your payment terms. After that, always list late payment policies and solutions. Finally, be clear to your customers about what penalties paying late can incur.
3. Reduce Payment Terms
If you allow a customer 30 days to pay after receiving the invoice, chances are they might forget. That’s why you should reduce the non penalty payment period. The smaller the window, the more likely they’ll pay.
Online payments are swift and easy, but that’s also why people might forget about them. By reducing the terms from 30 days to 14 or seven, you create a sense of urgency. With fewer days to dawdle, your customers will usually be motivated to hurry up and pay as soon as possible.
Remember, if you’re operating an online business, everything can be instantaneous. That’s why you can afford to speed things up. For example, you can change the payment terms from ‘net 30 billing’ to ‘net seven billing.’
Cash-on-delivery is a standard payment method, especially for food delivery services and similar businesses. This payment method is effective at eliminating debt since customers are required to pay immediately. Compared to handing an invoice, handling cash might be even more inconvenient, but it’s also more immediate.
Include clear details in your payment terms too. List all the associated costs to prevent confusion and outrage. No one likes seeing hidden fees that they didn’t know about or didn’t agree to pay. Clarity will help customers pay sooner.
4. Have Multiple Payment Methods
Some customers have particular payment method preferences, such as using PayPal. Others might even prefer wire transfers or Venmo. Credit and debit cards are another popular payment method.
You should accommodate as many types of payment methods as you can. In online business, the more methods you have, the easier your clients can pay you. You’ll find that supporting at least three will help your cash flow.
We mentioned cash-on-delivery earlier, and that’s another great way to pay. Consider supporting this method, mainly if you do physical deliveries.
Without having to set up a new payment method just for you, your customers will find it more convenient to pay. As a result, you’ll discover those bad debts will decrease.
5. Offer Early Payment Discounts
Sounds creative, right? Early payment discounts give your customers more incentive to pay earlier. You can also sleep peacefully at night when customers pay up quickly.
However, you shouldn’t think of this tip as a cure-all either. Some customers take advantage of early payment discounts but still pay later than the discount payment plan allows. This can result from negligence, but it will also negatively affect your bottom line.
Because of this, it’s essential to prevent late payments from happening. While it’s great to get paid early, you shouldn’t let dishonest clients take advantage of this incentive. Don’t give out price reductions in vain.
6. Don’t Be Shy to Ask for Payment
The ‘customer is always right’ mentality can hold you back immensely when it comes to payment for your services. It can reduce your cash flow and cause you to incur additional debt. Instead, you shouldn’t be afraid of confronting your customers when they’re not paying or are late.
If your customer doesn’t keep their end of the payment agreement, you have the legal right to send emails or even call them. However, before calling, you should be aware of your customer’s payment situation and performance.
However, there are limits as to when you can contact nonpaying customers. State laws usually have a few of these limitations:
- No harassing and repeated phone calls
- No lying to contact the debtor
- You can’t threaten with impossible legal action
- You can’t tell the debtor you want them arrested
- Sending mail with reference to debt collection is not allowed
- Collecting more than the actual debt’s amount is illegal
If you’re not sure what you’re allowed to do, consult your state’s laws or an attorney. Business law attorneys will know how to assist you.
7. Conduct Credit Checks
If your online business is larger, you might have to schedule credit checks to determine if a customer is a reasonable payment or credit risk. If they have trouble paying, you might have to reduce their credit limit and discuss payment terms with them. Good debtor management will typically involve regular check-ins with the customer to find an agreeable payment plan.
Even a long-standing customer can become a nonpayment issue, so you shouldn’t forget about them. Many businesses may neglect to check on these customers due to their previous payment history and simply go on blind trust. But this can result in them racking up debt, and if push comes to shove (and a collection agency is needed), you might lose them.
That’s why you should check on your customers, both old and new. By establishing trust between your business and the customers, you can ensure they pay you sooner.
8. Invest in Credit Management Services
There are a variety of credit management services available, from credit insurance to debt recovery services. These companies can help you handle and collect bad debts, but there is a risk. This is because some services may be legal in one region but not in others. You’ll have to consult government agencies to determine which services are accredited or legal in your area.
You must make sure the services are legal where you are.
9. Accounting Software
There are plenty of comprehensive, cloud-based accounting software tools available for your reports, invoicing, bank transactions, and such. Accounting software like QuickBooks Payments also allows you to issue electronic invoices. You can also use Freshbooks which actually sends reminders on overdue debtors.
FAQ
How Do You Deal With Difficult Debtors?
Some debtors respond and pay up when prompted, but others make the situation even more difficult. There are still ways to convince them to pay you. Here are some tips for dealing with difficult debtors.
- Empathize with their situation
- Treat them with respect
- Engage with them on common interests
- Tell them they can get out of debt with some help
- Don’t be cold and impersonal
- Answer their questions truthfully
- Focus on the positive outcomes
More often than not, your debtors are unwillingly thrust into a bad financial situation. By learning what problems they have, you can show yourself to be understanding and offer a solution. This will result in a win-win situation.
However, if you approach them aggressively, you’re more likely to turn them off. You might even lose a customer because of this. Therefore, it’s not recommended to be aggressive in collecting debt unless you have no other choice.
Why Is Debtor Management Important?
Good debtor management allows you to forecast your business’ future, maintain cash flow, and plan for ongoing growth. Without it, you could be stuck with unpaid bills and financial uncertainty for a long time.
Without debtor management, your business may even eventually fail. Of course, no one wants that, so you should learn how to manage debtors.
How Do You Convince a Customer to Pay You?
As mentioned, being understanding and working with your customers will help them make arrangements to pay you. Other ways may be to help them create and stick to a payment schedule and simply show that you emphasize with them. If you and the customer have a good relationship, they’re more likely to pay you.
Making the payment process easy, like allowing auto-pay, is very effective as well. Do some of the work for them so they’ll come back for more.
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My Debtors Are My Friends
Good debt management can be beneficial for your business and clients. With the help of our tips for improving debtor management, you can experience peace of mind and grow your business. Make your debtors your partners in doing good business, and they’ll come back for more.
