Late payments aren’t just annoying, they’re harmful to the cash flow and profits of your small business.
It’s therefore crucial that you learn how to prevent late payments from happening and how to handle the situation effectively when they do.
In this article, we’ll discuss eight steps you can take to deal with late payments.
Some are proactive and preventative, while others are reactive and help you get the money you’re owed.
By following these steps, you can ensure that your revenue always reflects the services you provide for your customers.
Let’s dive in.
- Make Your Payment Terms Clear
- Send the Invoice on Time
- Offer a Wide Range of Payment Options
- Send a Polite Payment Reminder
- Contact the Customer by Phone
- Consider Adjusting Your Payment Terms
- Charge Interest on Late Payments
- Consider Taking Legal Action
- Conclusion
Make Your Payment Terms Clear
First, ensure that your payment terms are clearly expressed in your contract.
By terms, we mean the payment due date, accepted methods of payment (credit card, etc.), and any instructions for how and where to make the payment.
You can also consider including the following:
| Penalties for late payments |
| Early payment discounts |
| Credit policies |
| Staggered payment options |
Being clear about your terms and getting the customer to agree to them reduces the chances they will fail to fulfill their obligations because they misunderstood how or when they were supposed to pay.
This happens all too often. For example, one customer might be late because they learned last minute that their vendor doesn’t accept their preferred payment method.
They then have to move money around and figure out how to get their service provider the money, which can take days or weeks, especially if they need to make fund transfers between financial institutions.
In addition to clearly stating your terms in the contract, it’s a good idea to also mention them in conversation or over email with your new client so that they really get the message.
Sometimes people’s minds shut off while reading a contract. This is far less likely to happen when they’re talking to someone or reading a short, important email.
In sum, having and sharing your payment terms ensures that your customers have all the information they need to make the payment by the deadline.
Send the Invoice on Time
As a rule of thumb, service providers should send invoices as soon as the service has been completed.
This immediacy gives customers ample time to pay the invoice and reduces the likelihood of them defaulting. It’s one of the best ways to speed up invoice payments.
Plus, when a customer gets an invoice for a service they just received, they’re still in a thankful mood and therefore more likely to promptly and happily pay their vendor.
If you wait too long, they might completely forget about the service you did for them and potentially even dispute the charge.
In addition to sending the invoice promptly, you should also ensure that you’ve included all the information your customer or their accounting team needs to pay you.
Double-check to ensure that you’ve correctly written the recipient’s name, the due dates, service descriptions, invoice number, and other necessary elements.
Often, the fastest way to send accurate invoices is through digital invoicing.
Consider using a tool like Regpack, which helps you streamline the invoicing process and reduces human error.
Plus, the tool allows your customers to track and make their payments through an online portal so that they don’t forget about their obligations as easily:
Source: Regpack
These digital invoicing features, along with the practice of invoicing immediately after finishing your service, will limit the number of late payments you have to deal with.
Offer a Wide Range of Payment Options
The more payment options you offer to your customers, the less often you’ll hear “I just can’t pay that way”—one of the more frustrating and hard-to-overcome late payment excuses.
These days, customers expect to be able to pay using whichever method they prefer, whether that’s via ACH transfer or credit card.
And they want to be able to make these payments online.
Therefore, along with creating an online payment option, you should aim to expand your accepted payment options to include the following methods, prioritizing the ones at the top, like mobile wallets and credit cards:
Source: Oberlo
Of course, your industry might have different payment preferences than the rest of the world, so listen to your customers.
Or go right ahead and ask each one how they’d like to pay you and then work to satisfy those desires.
For example, if a significant portion of your customers have voiced that they’d like to pay you through PayPal, focus on making that option available before integrating the others.
Customers adore convenience.
When you give them the ability to pay you in the most effortless way possible, they’ll be less likely to procrastinate, and you’ll get fewer late payments.
Send a Polite Payment Reminder
Even after enacting all your proactive approaches, some customers are still bound to be late on their payments.
Most of the time, this tardiness will be accidental in that the customer will have simply forgotten to make the payment.
Then, compose a payment reminder email that includes the following information:
| The payment’s due date |
| The total amount due |
| How to make the payment |
| Any late policy |
Write the email in a friendly and polite tone so that the customer doesn’t feel like you’re angry with them.
Your forgiving and flexible attitude will win you their favor going forward. Consider using one of our late email templates for guidance and inspiration.
It can also be helpful to remind the customer about the payment a day or two before the deadline. This lessens the chance of a customer being late in the first place.
For more on this topic, check out our article on how to write late payment emails that get you the money you’re owed without causing any waves in your relationship.
Contact the Customer by Phone
If your payment reminder emails have been ignored, it’s time to call your customer to figure out what went wrong.
Having a polite conversation, in which you try to understand rather than criticize, makes it easier for you to get to the bottom of the issue and find a mutually beneficial solution that involves you getting paid.
If the customer has simply forgotten to pay, that’s great, but sometimes there will be another problem holding them up, one that takes a bit more thought to fix.
In that case, cooperate with the customer in finding a solution so that you can get your money. In other words, help them help you.
For example, if during your discussion you learn that they’re struggling to pay the full sum because of cash flow issues, consider offering them to work out a payment plan.
If you find that they can’t pay through your accepted methods, look for a workaround that will suit both of you.
It might just take a little bit of online research to find an alternative that fits both your needs and is quick to set up.
All of this will be easier to figure out if you contact them directly.
In short, phone conversations are often the fastest way to solve a payment issue and get your late payment.
Plus, working through this dilemma in real time will strengthen your relationship with your customer.
Consider Adjusting Your Payment Terms
If you’re dealing with a customer who has a track record of paying their invoices on time, consider adjusting your payment terms for them, provided that they have a good reason for being late.
That might mean extending the deadline or offering them a payment plan where they pay in installments over a specified period of time.
For example, if a customer owed you $1,000, but was currently strapped for cash you could give them the option to pay $500 now and $500 next month.
Offering a customer a payment plan at the start of your relationship is another good way to prevent late payments because they’ll be able to pay in a way that suits them financially.
Many small businesses use Regpack to create and offer these personalized payment plans to their customers:
Source: Regpack
The above example gives customers the option to pay in monthly installments, two payments, or one in full.
In sum, while changing your payment terms might not be great for your current cash flow, at least you’ll still get the money you’re owed and maintain a strong, long-term relationship with one of your loyal customers.
Charge Interest on Late Payments
Creating a late penalty such as charging interest on late payments will incentivize customers to pay you on time.
For example, you might create a policy that states customers incur a fee equal to 5% of the total invoice amount for every month they’re late settling their debt to you.
Putting something like this in your contract will surely discourage customers from letting their payment slide past the due date.
To ensure customers don’t complain about a late fee charge or feel cheated, you should inform them about the policy, along with your other payment terms, at the beginning of the relationship.
Here’s an example email of a business informing a customer about their late fee policy:
Source: billergenie
A late fee policy isn’t something you should just put into your contract and never talk about.
Make sure to point it out to your customers in person, on the phone, or at least over email.
That way you can also address any customer concerns about it and help them understand why this policy is important to protect your business.
It’s better to deal with objections before you’re putting the late fee into action against a customer who is late on a payment. That’s a major headache waiting to happen.
If you’re worried about bringing this up to a new client, check out this article by Keeper Tax on how to set fair late fees and how to tell your customers about them.
An alternative to late fees is a prompt payment discount—when you give a slight discount to customers for paying a certain number of days before the actual due date.
This option is probably better for anyone who knows they’re going to be strapped for cash during a slow season and therefore want to shorten the payment window from net 30 to net 15 or some similar jump.
In sum, it’s critical that you find ways to encourage your customers to pay you by the due date, and charging interest on late payments is an incredibly effective method.
Consider Taking Legal Action
If all else fails, the final step in dealing with late invoices that remain unpaid is taking legal action or writing it off as a bad debt, or uncollectible debt, if it’s not worth fighting for.
Source: Wiki Accounting
If there’s still a chance of recovering the debt, it’s called a doubtful debt.
In that case, you should try to contact your customer over the phone to talk things out before taking one of the following actions.
If you finally decide to call it a bad debt, make sure to let the client know that you’ll no longer be working with them in the future.
Take legal action only if the amount owed is large enough to warrant the lengthy and often expensive legal process.
If you choose this road, make sure that you have all the records that will serve as evidence to support your claim, including the contract between you and the client and your accounting documents.
Also, it’s a prudent move to hire a legal professional to help you win the case.
Having one leading the charge or even just advising you will increase the chances that justice will be served and that you’ll get your hard-earned money.
Conclusion
There are many ways small businesses can reduce the number of late payments they receive.
They can start by making payment terms clear, creating a late penalty, and offering a wide range of payment options.
If a customer is late, businesses should send a reminder, call the customer, consider adjusting the payment terms, and perhaps even take legal action.
For more ways to prevent late payments and retrieve what you’re owed, check out our article on 15 creative ideas for handling late-paying customers.
