How to protect your business’s finances from your customers
When it comes to running a successful business, it’s no secret that the customer is crucial to success, but what about when that lifeline turns into a risk? Two-thirds of business owners recently surveyed by APQC reported a slowdown in customer payments over the last five years. Since small businesses rely heavily on everyday cash flow to fulfill financial obligations like paying bills, replenishing inventory, and making payroll, late payments or failure to pay can be devastating.
Not only can late or non-existent payments create an immediate disadvantage for the small business owner, if frequent or large enough, they can create long-term credit problems with your own suppliers by causing you to default on your payments and lower your business credit score.
Though you can’t spot every risk, and even fantastic customers occasionally run into payment problems, there are ways that small business owners can mitigate their risk. Here are four steps that can help you protect your business finances from your customers.
1. Act like a lender: One way to protect your business is to start to change the way you think about new and existing business-to-business customer relationships. When you’re exchanging goods or services under a future payment agreement, then you’re “lending” those goods and services to your customer or client.
Acting like a lender means vetting customers at the start of the relationship and maintaining contractual payment agreements, including repercussions for late or missed payments, throughout an existing relationship.
To do this, perform business credit and reference checks before you do business with a new client. By performing these checks, you’ll be able to identify business customers who have a history of delinquent accounts. You can also look into factors to determine how much financial stress the client is under, such as their total credit utilization ratio or cautionary UCC filings.
2. Require deposits: In a perfect world, extending lines of credit to your customers would result in increased business and regularly paid invoices, but as you know, that’s not always the case.
Requiring a deposit for product provided or service rendered enables you to take a “glass half full” approach. If, for some reason, the customer does not or cannot fulfill their end of the bargain, the deposit may be the only money you see from the transaction. While it may not be ideal, at least you’re not left completely high and dry.
In addition to providing you with a little bit of a cushion if things go wrong, requiring deposits can:
- Reduce the risk of fraudulent orders.
- Mitigate the impact of replenishing inventory or increasing payroll in order to deliver the goods or services.
- Act as a penalty on future orders for customers who do pay late.
3. Have a collection process in place: There are multiple reasons a customer may not pay their bill. Some of them are completely innocent (forgot) while others are much more sinister (never intended to). However, a collection process can increase the likelihood that your invoice will eventually get paid.
American Express recommends that small business owners follow up with customers three days, one week, 15 days, 30 days, and 45 days if their payment is late. While this particular schedule may not fit your specific needs, establishing a follow-up plan, and sticking to it, can help keep your customers on track and your cash flow in check.
When developing your process, it’s best to include the types of follow up (phone, email, physical visit), any type of fees you’ll be charging for late payment, and how to handle accounts that simply don’t get paid (i.e., reporting them).
4. Provide more than one payment method: As a consumer and a business owner, you probably have a preferred way to manage your money and that includes paying your bills. Some of us like to simply log online to make a payment while others like to send in a check.
By offering more than one payment method, you’ll make it easier for customers to pay in a manner with which they feel comfortable.
A final note here is to consider adding an automated payment option to make certain that invoices are paid on time every month.
Protecting your business from risky customers isn’t always easy, and you may find there is that one who will always represent trouble for your cash flow. But implementing all or some of the steps above can decrease your risk.