Lax payment terms can get out of hand rather quickly.

They can also do much more damage to a business than you might think.

Why?

Because slow collections lead to significant cash flow issues—the #1 cause of business failure in the SMB world.

So this week, I’ll be sharing my 2 top tips for avoiding the problem in the first place—or getting your receivables back under control if you’re struggling with them right now.

Let’s get into it.

Tip #1: Offer Early Payment Discounts

When it comes to outstanding payments, your best bet is to prevent them going forward. Early payment discounts are one of the best ways to do that while keeping your client relationships strong.

These discounts are usually no more than 1-2%, but there’s no hard and fast rule here. All you need to do is make sure that you can afford whatever discount you decide to offer and that it’s actually leading to quicker receipts.

“But Connor, what about my outstanding amounts? And what if my client just won’t pay?”

Glad you asked.

My second tip is all about treatment rather than prevention.

Here it is.

Tip #2: Implement a Credit Policy

In the SMB world, extending credit happens every time you bill a client after rather than at the point of sale. While it’s common practice and generally leads to bigger contracts, doing so for every client can cost you.

A better strategy is to implement a credit policy that’s clear and consistent.

Here’s how to do just that.

First, make credit checks standard. Doing so lets you quickly assess which customers reliably pay their debts. From there, you can determine which clients must pay immediately and which ones can be billed later.

Next, determine how much credit you can comfortably afford. In other words, how long would your business be able to wait on payment before struggling to pay the bills? You may also want to adjust this figure slightly up or down based on the client’s risk level.

Now it’s time to define your terms. Spell out when payments are due, note interest rates as applicable, and share your early and late payment policies. This is also the time to decide whether or not you’ll require deposits for all, just some, or none of your customers to begin work. Additionally, make sure that your invoices are being sent clearly and consistently. If they are not, try adapting a template to fit your needs.

Even with an airtight credit policy, you’ll still have to deal with late or missing payments from time to time. So before you move on, you’ll need to decide how you’ll pursue those outstanding amounts.

My recommendation is to send out automated payment reminders to every client once invoices go out until payment is received. Then, once payments are truly late, begin following up by email or phone. Finally, forward it to collections.

Before you put your new credit policy to use, there’s just one more step. Talk it over with a small business attorney.

There you have it. My 2 top tips for managing out-of-control receivables.

To date, I’ve helped over 75 SMBs like this one grow with good finance and accounting practices.

So, if you need help or have any questions, feel free to reply to this message or shoot me a DM.

As always, I’m happy to help.

Putting It All Together

Here are your top takeaways from this week’s post.

1. Lax payment terms can get out of hand quickly, leading to significant cash flow issues.

2. Prevention is your best bet here. One of the best ways to do this is by offering early payment discounts—typically 1-2%.

3. Implementing a credit policy will allow you to screen for risky clients on the front end, outline your payment expectations, and provide a clear process to follow in the event of nonpayment.

4. But before you present any new processes or terms to the client, be sure to consult a small business attorney.

Hungry for More?

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2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor