Make Them Pay (On Time)

Running a customer-friendly business doesn’t mean being the banker at zero interest for customers who make a habit of delaying payments

Your business was running pretty smoothly – sales growing, and profits growing, too. Then the credit crunch hit, someone said the R-word, and everything started slowing down. Most troubling of all, your customers have been paying later and later, as if they are using your money to fill their own personal credit crunch.

Well, they probably are. Most of us don’t realize how dependent we are on credit to run our businesses. Vendor open-account credit – the kind you extend to your customers – is by far the largest source of borrowing power in our economy.

When you sell your products and services on credit, you are making interest-free loans to your customers, even if you are financing those loans with a bank loan for which you pay interest every month. When collections roll in on time, it all seems to work out nicely. But when collection slows down, you still need to replace goods you’ve sold, pay your workers, and pay the rent and all the other expenses of running a business.

Assuming your bank credit lines are in place and your margins are adequate, you can have a bit higher interest expense and still can ride it out with your customers. However, if your credit lines or cash reserves aren’t sufficient to cushion you from the sudden change in cash flow, your business could be in big trouble.

Besides, most bad debt write-offs come from old balances, not current ones. The older the balance, the higher risk it will never be collected. So your best bet is to encourage your customers to pay on time. No added interest, no hassle with customers, no write-offs, everyone is happy. You are probably thinking: “That was helpful. How do I do that, exactly?” Here are five ideas.

Improve your credit practices

Screen new customers more closely before granting a credit line. Spend a few dollars actually getting a credit report, and a few minutes calling a couple of their credit references. The conversation might concern their payment patterns when the economy slows, which could be different from good times.

A comment like, “They sometimes struggle to keep current but they always manage to get caught up,” could be a red flag. Also, be watchful of a prospect who has changed suppliers more than once in the past year. If you can learn the name of the previous supplier, that’s someone you want to talk to.

Make committed collection efforts

Make collection follow-up a key duty of at least one person in your company. Don’t give the job to someone in accounting to handle in his or her spare time. Accounting personnel may not be the best at customer communication, especially if the subject is touchy. Assign the job to someone who is a good negotiator, has an amiable but firm phone personality, and who understands that collection is a key job.

Most importantly, do what you say. If you promise something in return for prompt payment, make sure you deliver. If you say you must deny future shipments until an account is brought current, stick to it – every time. Key point: If your collection practices have been lax in the past, a culture change may be needed in the minds of your customers who may be tempted to ‘wait you out’ to see how long the new rules will stick around.

Call ahead – make sure they’re ready to pay

Have your collection person call the customer a few days before the due date for payment, “as a courtesy,” just to make sure everything is in order and the check will be going out on time. This little reminder; when positioned with friendliness and a desire to help, you can make a friend of the person who actually cuts the check.

If your customers are lacking something they need in order to pay, such as a copy of the invoice, this would not be a good time to give in to their inefficiency. Your effort to quickly provide it, without them having to find it, could put you at the head of the line for payment.

Consider discounts for prompt payment

This old technique worked well years ago but has fallen into neglect in recent years as business practices evolved. The old “2 percent/10 net 30” was and still is a great deal if explained to customers clearly. Consider this: a two percent discount for paying 20 days earlier than normal amounts to an annual return of 36 percent – not a bad yield for a customer whose savings account is probably earning two percent a year.

Even if your customers plan to pay in 45 days, getting them to pay in 15 days instead represents an annual return to them of 24 percent. You can juggle the numbers any way that makes sense, but the key is getting the customer to understand the value they get from paying promptly. And by the way, if you do business with certain organizations, such as local governments, many are required by their policies to take advantage of such discounts. Key point: Be strict about charging back discounts taken when payments don’t come in on time.

Try a preferred customer plan

Want to think out of the box? Consider a program for special customers: extra discounts, advance notice of price changes, or special sales. Promote this as a customer benefit and make it available only under certain conditions, one of which is consistent payment according to terms.

Make the conditions list beefy enough that it doesn’t look like a poorly disguised collection program. Use it as an opportunity to reward the customers you enjoy doing business with, especially those who pay on time every time. Key point: Avoid alienating customers who are in the program but then fall behind in one or more criteria. Give them the opportunity to rejoin the program after a few months of again meeting all conditions for participation.

You can appreciate your customers’ dilemma in trying to stretch their cash. But that’s not the same as agreeing to be their banker – interest free. You can extend their payment terms, as many companies do at times like these, but in the end you still need to collect your money by a date you can plan on. And you need to avoid alienating your customers in the process.

If you do everything you said you would – quality service, competitive price, prompt response – then it’s reasonable to expect your customers to do everything they agreed to, and that includes paying you promptly.

Still, these days, most suppliers will get paid late by many of their customers. Follow the suggestions above and you can be the exception to the norm, and better positioned when the economy turns around again, as it always does.



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