Slow-paying customers can create big problems

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Published: May 19,2003

You have a great product, a good sales team and things look very bright for your business — until you find that some customers are slow to pay, creating a bottleneck in your cash-flow situation.

“Bill collecting is something that you have to stay on top of from the beginning, and not let it get into a dangerous situation,” said Wayne Downing, chairperson of SCORE (Service Corps of Retired Executives), a business counseling service sponsored by the Small Business Administration (SBA), in Greenville.

SCORE offers five tips for successful debt collections:

• Assume that most people are honest and want to pay you. Treat customers with respect during the collection process.

• Try to find out why a customer is not paying. Has he fallen on hard times — a lost job or ill health? Or, is he withholding payment because your product was faulty or your service was poor?

• Keep a customer’s total payment history in mind. If she has paid on time over the years, don’t jump on her with a collection call the first time she’s late.

• Be a good listener. When you understand the situation, you can come up with solutions that will help the customer get you paid.

• Remember that friendliness will help a customer want to pay you first.

Adele Lyons, executive director of the Gulf Coast Business Technology Incubator, said bill collecting is always an issue with small businesses.

“It is great to book a sale, but until you get the money, it isn’t getting you anywhere,” Lyons said. “Traditionally, people tend to concentrate on the business with the thought that people will pay on a timely basis. That’s not always the case. Sometimes it may be their own invoicing process that can cause them some cash-flow problems.”

There are two schools of thought regarding invoicing. Do you invoice right after delivery of the goods or service, or wait until end of month, which might be preferable from an accounting standpoint?

Lyons said that from a cash-flow standpoint, you should invoice immediately after the work is completed so the process can begin.

“It is never fun to ask anyone for money even though they owe it to you,” Lyons said. “So, be sure you have good procedures. Invoice immediately in the mail after the job is complete. The terms of the payment should be clearly stated including due dates, and where to mail the check. Don’t give people an excuse that it is difficult to pay you.”

Providing a return envelop with the invoice makes it more convenient for people to pay. And if that payment doesn’t arrive on time, reminders can be made by sending a note, a fax, an e-mail or by making a telephone call.

“People don’t like to make the phone calls, but I think they are very effective,” Lyons said. “It is embarrassing to get a phone call, particularly if it is someone you know and have done business with.”

Other tips include making sure that you have the right information on the company, the name, address, phone numbers and who is authorized to place orders.

If dealing with an individual, it is important to get his or her Social Security number if you want to get a credit report or collect on a bad check.

“People aren’t as likely to want to give out that information now,” Lyons said. “But if you are going to do business with someone, that is what you need. If the customer has had credit problems in the past, that might be an account you want to watch pretty closely. Don’t let them get over 30 or 45 days.”

Non-sufficient fund (NSF) checks can be a big issue. When you get a check, only to find that it doesn’t clear the bank, it is important to have a policy and procedure for how to collect. If you want help from the district attorney’s (DA) office to collect on bad checks, there is a certain letter that must be sent out.

“Generally, if people get a letter from the DA regarding a legal issue, they pretty much jump to it and make that check good,” Lyons said. “There is a certain time frame in which you have to send the letter.”

Lyons said that while the business incubator she operates wants to help small businesses, it is also a business.

“We also have budget issues,” Lyons said. “If we don’t collect the money due to us, we can’t do the programs for the good of everyone. We spell out clearly that rent is payable on the 5th. If it is not paid by the 15th, a 4% late fee is added. That is pretty standard and is allowed by Mississippi law. On the 30th to 31st day, we issue an eviction notice. That gets the clock ticking in our favor if we have to go to court to get someone evicted. That rarely happens. People know if they are late, they are going to get a late fee. We rarely have people write us a check that is not good. When we do, there is no question from the staff or customer standpoint what the procedures is.”

While dunning customers is no one’s favorite task, a business can’t stand for bills to remain unpaid. A business has its own bills, debts, payments and obligations.

“To keep everything flowing, you have got to collect,” Lyons said.

Auto bank drafts and automatic payments on credit cards are increasingly popular for vendors such as phone companies, power companies, Internet service providers and cable television companies. Customers can’t forget to pay. But there is a cost involved, usually 2% of the transaction, whenever businesses accept either debit or credit card payments.

The automatic payments make accounting easier, and can improve security by not having as much cash on hand that could be embezzled or stolen.

“The less cash you have on hand, the better,” Lyons said. “It is a secured paper transaction. It just depends on what business you are in and how important security is.”

More tips on collecting from slow pay customers can be found at http://www.score.org/fc_5.html.

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.

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