Late-paying clients can be incredibly frustrating for small business owners, impacting cash flow and consuming valuable time. In fact, 73% of businesses are negatively affected by late payments. Here are five effective strategies to manage late-paying clients.
1. Remember You Deserve Payment
Many small business owners feel uncomfortable asking for payment, but it's essential to change this mindset. Asking clients to pay is part of your business, and you shouldn't feel bad about it.
Always remind yourself: You worked hard, and you deserve the payment. The money you’re owed is yours, not theirs. If it helps, adopt the motto “I deserve this money” whenever you need to follow up on a payment. Write it on a sticky note and place it where you can see it. This mindset will help you feel more confident and less guilty about pursuing what you’re owed.
2. Set Clear Payment Deadlines
Set clear, immovable payment deadlines in your contracts before starting work. While 60- or 90-day deadlines are common, choose a timeline that suits your cash flow needs. If a 60-day deadline disrupts your monthly payments, opt for a 30-day or even a 14-day deadline.
Make these terms ironclad in your contracts to protect yourself in case collection services or legal actions become necessary. If a client balks at your timeline, consider it a potential red flag. However, if you believe the client is worth being flexible for, negotiate a compromise that still meets your needs and update the contract accordingly.
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3. Use Incentives and Penalties
To discourage late payments and protect yourself, consider adding incentives and penalties in your contracts.
First, offer a financial incentive for early payments. For example, if your payment deadline is 30 days, provide a small discount (up to 5%) for payments made within 14 days. This discount is worth the peace of mind and time saved from not having to chase payments.
Second, include a late payment penalty in your contract. Decide on a reasonable percentage and timing, but be cautious not to set it too high, as it can create resentment. The goal of a penalty is to deter late payments, not to punish clients. This clause should encourage timely payments and protect you if delays occur.
4. Automate Invoicing and Follow-Ups
Late payments can require frequent follow-ups, which can be time-consuming. To manage this, consider using accounting solutions like FreshBooks, QuickBooks, or Xero to automate invoicing and reminders.
These programs can automatically send invoices and preschedule reminder emails for late payments, freeing you to focus on other business tasks. Many also allow clients to view and pay invoices directly, making the process smoother.
Enhance this approach by setting up additional payment options like PayPal or Bill.com, making it easier for clients to respond to payment reminders.
5. Stay Calm and Professional
Late payments can be frustrating and stressful, but it's crucial to remain calm and professional. Anger will only hurt your business relationships.
Late payments are common in business, with over a third of customers paying at least two weeks late. Getting angry each time this happens can harm relationships with clients you don’t want to lose. Remember, not all late clients are bad clients; they might be facing temporary issues.
Maintain a cordial relationship with late-paying clients by sending friendly and personalized reminders. This approach is especially important for clients who aren't consistently late. Understanding their situation can help you retain valuable clients and build stronger relationships. Patience and professionalism can turn temporary payment issues into long-term trust and reliability.
Late payments are a common challenge for small businesses. By implementing these strategies, you can better manage late-paying clients and protect your cash flow. How do you handle late payments? Share your tips with other small business owners.
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