Last Updated on October 27, 2023 by Mubashir Rafique
You’ve chosen your name and started trading. You’d think the hard parts are done, but as a business owner, one of the most frustrating challenges is dealing with late payments.
Late payments can be highly disruptive and sometimes even catastrophic, depending on the size of the bill. If it’s a big client who represents a large portion of your monthly revenue, late payments can be more than just inconvenient, especially if you’re a new business and have loans to pay or very slim margins.
It’s, therefore, vital to establish a consistent set of practices that reduce the number of late payments you receive.
Fortunately, there are a few easy steps you can take to minimize cash flow interruptions, and we’re going to share three simple yet effective ways to get your clients to pay on time.
Incentivize Your Clients to Pay Early
There are a few different ways to make early payment more attractive to your clients. The first and possibly the best of these is to offer a financial incentive.
For example, offering a small discount to clients who pay within a short period after the invoice has been issued. A 5% discount for clients who pay within the first week doesn’t cost you too much and will increase the motivation for them to pay promptly.
Alternatively, you can add a late payment penalty to your payment terms. It’s good practice to give your clients a fair amount of time to pay. However, you are within your rights to introduce a penalty for payments more than 30 days late. For example, you may include a 5% additional fee for payments later than 30 days, 10% for payments later than 45 days, and so on.
If you don’t want to take the financial route, then you could offer other bonuses to clients who pay early. Thank you notes, gift cards, company merchandise, priority delivery, and vouchers for discounts on future purchases are all great ways to encourage not only early payment but also customer loyalty.
Make Sure Your Invoices are Professional and On Time
A professional invoice sent promptly is probably the best thing you can do to avoid late payments. Ensure that your invoices are easy to read and inclusive of all necessary details.
Your business name, contact information, invoice number, itemized bill of all products purchased/services rendered, payment terms, and clear payment instructions should all appear on every invoice you issue. A thank-you message is also always an excellent inclusion. It’s not the client’s responsibility to contact you regarding missing information. A client may simply ignore an unprofessional or incomplete invoice, especially if they have other administrative duties to tend to.
Secondly, it is good practice to send invoices as soon as possible. Invoices that arrive promptly are more likely to be paid promptly. In today’s fast-paced world, where employees and business owners attend to hundreds of tasks a day, a client’s attention moves on quickly. Therefore, delivering their invoice while your interaction and service are still fresh in the client’s mind increases your chances of getting paid immediately.
If prompt invoicing is something you struggle with, you may wish to consider using automated invoicing software. There are plenty of options to choose from, allowing you to tailor any financial software you use to the needs of your business. Certain software comes with additional useful features, such as automated basic bookkeeping, automatic payment reminders, and compatibility with digital banking software.
Make Your Payment Terms Clear from the Get-Go
Always ensure that you communicate your payment terms clearly to your client upfront to avoid confusion and late payment. This is best done in writing, so there’s a clear paper trail that you can both refer to should the need arise.
You may wish to send new clients a friendly, welcoming email that includes your terms of payment, including the payment period, preferred payment method, and any incentives or penalties that may apply. Alternatively, you could add this information to your website, especially if you work in a creative industry where you have a portfolio website that features your rate card. Additionally, your payment terms should be clearly outlined on your invoices as a reminder.
If you still struggle to get certain clients to pay on time despite clearly communicating the payment terms, you may wish to consider sending reminder emails. These emails should be warm and professional in tone. You don’t want to alienate the client, simply remind them that their payment is due.
Most late-paying clients aren’t actively trying to get out of paying. If you’re expecting payment from a client that is also a business, chances are your invoice got buried under other financial admin, and they just need a friendly reminder that payment is due.
It is also important not to send reminders too soon after the invoice has been issued or too frequently. Clogging up a client’s inbox with requests for payment only a few days after issuing the invoice may be considered unprofessional or may even constitute harassment. Give your clients at least two weeks before sending a reminder, then another week or two before sending the next one.
Establish a basis of open communication with your clients, and try to give them the benefit of the doubt if a payment is late, especially if they usually pay on time. They may be dealing with financial setbacks of their own.
If you are able, you may wish to offer alternatives to clients who can’t pay on time, such as an extension on a payment due date or perhaps an option to pay the invoice in installments. People are always easier to work with under conditions of transparency and cooperation. A little goodwill to a client who needs to secure finance can go a long way toward encouraging repeat business.
Ensure You Encourage Prompt Payment
There’s plenty that you, as a business, can do to minimize the number of late payments you receive. Incentives, clear payment terms, open communication, and professional and prompt invoicing are all useful steps you can take to ensure you get paid on time and in full.
While the responsibility of payment always lies with the client, it’s also the business’s responsibility to maintain a good working relationship with the client.
Clear communication, a cooperative spirit, and consistent professionalism will go a long way toward maintaining financial health as well as good customer loyalty.