Staying on Top of Collections
In an uncertain economy, your business will take all the customers it can get. But what if some of those customers aren’t reliable when it comes to paying their bills? In that case, it might be better not to have them as customers at all. That’s why it’s important to be aware of the signs that a prospective customer could be a payment risk. And, if payment issues do arise, you must act quickly to head off trouble.
Red flags
To reduce the risk of future collections problems, watch out for these warning signs before you take on a new customer:
Anonymous clients. Some prospective customers don’t seem to exist anywhere other than, say, a vague email address. This is a sign to move cautiously. It’s not too much to expect that even start-up businesses have some sort of online presence, a true location, and a working email address and phone number.
Empty assurances. Sometimes potential clients ask that work on their product or service start immediately, but without providing assurances that payment will be forthcoming. In some industries, it might be common practice for suppliers to provide goods or services and follow up with invoices later.
When that’s not the case, however, consider the lack of credible assurances to be a warning sign. That’s especially true if a prospective customer is vague on the budget for a project.
Future earnings as payment. Customers who promise some portion of future earnings as payment may be legitimate. But, before you begin work, nail down the terms and decide if the potential reward compensates for the risk.
How realistic are the visions of success? And what happens if, despite everyone’s best efforts, the new idea never takes off?
If you’re skeptical you’ll be able to collect from a customer, it’s wise to ask for a retainer or deposit up front before starting a project. You can also request progress payments while the project is in process.
Unfortunately, sometimes red flags don’t come to light until you’ve accepted a new customer. For example, a client who regularly nitpicks most elements of a project may keep it from ever getting off the ground. While clients have a right to expect the level of quality promised at the outset of a project, those who seem to continually search for reasons to criticize products or services may be using their purported dissatisfaction to avoid paying for their purchase.
Positive actions
Even business owners who pride themselves on distinguishing good prospects from bad don’t always get it right. The following steps can help:
Politely but firmly follow up. A tactful email can provide a gentle nudge when an invoice is overdue. For example: “It looks like Invoice #1000, dated November 1, 2021, for $500 (for 25 widgets you purchased), may have been overlooked. In case it was lost, I’m resending it.”
This message lets customers know that you’re aware of the payment due, yet offers them the benefit of the doubt. Most people want to operate ethically, and even prompt payers make mistakes from time to time.
Move to a phone call. If your follow-up email(s) aren’t generating a response, a polite phone call should get the client’s attention. Many people find it harder to ignore or say “no” to someone in an actual conversation, as opposed to an email.
Try the customer’s accounts payable staff or business manager. If previous efforts aren’t working, a shift to the accounts payable or business manager may be more fruitful. But remain courteous. It’s possible that the invoice truly is lost or is stuck on someone’s desk. And this may be the first time the person learns of the payment delay.
Recognize the signs
Of course, maintaining good relationships with customers is always good business — unless and until they fail to pay you. If that happens, you’ll need to be proactive about the situation.
Many customers just need a friendly reminder (or two!) and are happy to pay up. With others, more serious action may be required — up to and including legal action. Try to avoid that by recognizing warning signs early and taking appropriate steps to get things back on track.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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