There are few things more difficult for a small business than trying to collect outstanding debts from customers while simultaneously keeping them happy. While a slow-paying customer is annoying, even worse is when a customer doesn’t pay at all.
Read more: A guide to debt collection: template reminder letter and letter of demand
To ensure this process is made as easy as possible, here are five tips to help get paid.
1. Develop a credit policy
While developing a credit policy can sometimes be boring it is incredibly important, so don’t be tempted to skip over it. It should be your reference for the businesses you will provide terms to, under what circumstances and what the credit limit will be.
2. Run credit reports and have an approval process
You should set out the steps for how you take on new debtors, such as collecting relevant information about the debtor and assessing their creditworthiness.
If you start doing business without conducting due diligence then you shouldn’t be surprised if payment terms stretch out or bad debt piles up. When taking on a new customer, ask yourself, “how do I know these guys are going to pay their bills?”
Credit management tools exist out there to help reduce the risk of bad debt. Even the most basic credit report will identify the business you are about to deal with (legal name and ABN/ACN) and whether they are a credit risk. From here you can decide whether you conduct business with them or for example, do you offer them terms or put them on cash upfront payments only?
3. Have Ts and Cs in place
You don’t work for free so getting paid is a non-negotiable. Ensure your terms and conditions are signed off by the client before any sort of transaction goes down. Your terms and conditions will outline exactly what is expected of the client and the steps that you’ll take to collect overdue payments, including legal action.
4. Manage your debtors
Whether you have one or 1000 customers, it can be hard to know what sort of financial position they are in at all times or whether they are racking up debts with other suppliers. Debtor monitoring tools like the one provided by CreditorWatch can keep an eye on your customers and warn you if they get into financial difficulty or start defaulting with other suppliers. It’s a great way to stay ahead of a potential bad debt as you can move the client onto COD or put their account on stop until they have paid their outstanding debts.
5. Outstanding or slow-paying customers
The squeaky wheel gets the grease!
Unfortunately, we will all eventually have to deal with a customer that refuses to pay, dodges phone calls, or disappears into the ether. This is where you have to get serious.
Send them a letter of demand outlining your next steps as stated in your terms and conditions. Register a payment default against them on a credit reporting bureau as this will motivate them to pay, especially once their credit is stopped by their other suppliers. The next step is to consider commencing legal action.
These practices should provide the backbone to any credit management system. By remaining vigilant about credit, you can keep your clients happy while maintaining a healthy cash flow.
Patrick Coghlan is the commercial director of CreditorWatch, a credit reporting agency that provides credit reports, debtor monitoring and debt collection tools.
Smart Company is a sister publication to The Mandarin, catering to Australia’s entrepreneurs, small and medium business owners and business managers.
