Get customers to pay you faster: 8 steps

I receive a couple dozen e-mails and snail-mail letters each week from startup entrepreneurs and small-business owners. Unfortunately, while the tone of the missives is generally optimistic and friendly, there always seems to be an undercurrent of stress and indecision.

Typically, I hear from business owners who either have trouble raising money or simply can’t get paid by their customers on a timely, predictable basis. These issues are related too—potential investors and lenders tend to stay clear of companies that can’t manage their receivables.

My antidote for this angst is the following eight-step collection plan.

1. Know the rules of small-claims court.   Before any business owner can establish credit policies for a new company, a little research is required. The first stop is the local county small-claims court’s Web site. Small-claims court is a fast, low-cost alternative to collection agencies and litigation.

   In addition to learning what documentation you’ll need to file an action, pay attention to the local monetary jurisdiction. States have different rules, as do the individual counties within them. For example, Virginia will not rule on claims of more than $5,000. In California, business owners can’t file more than two claims for more than $2,500 in any single calendar year. Ideally, you never want to offer customers credit that exceeds the small-claims limit in your county.

2. Set short billing cycles.   The faster you send out bills, the faster you can receive payment. Service companies should consider sending out new invoices once a week, rather than once a month. Product-oriented companies should automate billing to the date of product shipment.
3. Establish clear payment due dates.   I'm an avid patron of small businesses. It always amazes me how often I receive invoices from small-business owners with no detailed payment due date. If you don’t list the date a bill is due, how will a judge know how to rule? Better service contracts and invoices also stipulate exactly when bills are "past due," to clarify when late charges can start to accrue.
4. Put it in writing.   For service-oriented businesses of any kind, no work should begin without a signed service agreement. A service agreement is different than a work proposal. Service agreements should be signed by both parties. They should include a detailed description of the proposed work project, billing rates, payment rules, and how disputes will be resolved. If you have to go to court or arbitration to collect payment, assume that this document will be "Exhibit A."
5. Penalize nonpayment.   The best one-two punch is to charge interest on unpaid balances, plus include language that the customer agrees to pay all costs associated with bill collection, including reasonable attorneys' fees. Attorneys love it when they have a well-documented, winnable case in which the deadbeat customer has already agreed in writing to pay the legal bill.
6. Establish minimum down-payment policies.   Potential customers that come up with excuses for not making down payments are likely to come up with wilder excuses for not making payments down the road. Simply stated, if your customers can't afford down payments, then they can’t afford the entire job.
7. Develop an anti-procrastination collection plan.   To minimize indecision, write down the timing of every step you will take against a delinquent customer leading up to filing an action in small-claims court. For example, your plan can read:

   "On day five, I will send a duplicate statement. On day 10, I will call the billing office and advise that the customer’s account has been placed on hold for future work or shipments. On day 15, I will call or visit the person who signed the service contract. On day 30, I will send another bill and letter advising of future action this time with proof of delivery. On day 45, I will organize documentation for small-claims court. On day 60, I will file a claim in small-claims court and notify Dun & Bradstreet of the customer’s delinquency."

   This plan should minimize the time small-business owners spend collecting bills. Try it; I believe it will work for you.

8. Personalize your collection policy.   Customers should hear something about collection expectations at the time you discuss pricing terms. Just last week, I coached an owner of a health-care company for the elderly who kept sending nurses to homes even though the children who were responsible for payment were delinquent.

   I encouraged her to practice talking about the role of payment in the delivery of health-care services. Such as: "We are selective in hiring nurses and pay them well for the benefit of our customer’s parents. When we don’t receive prompt payments then we eventually have to let our best, most responsible nurses go."

   By the end of our coaching session, this owner was committed to receive advance payment from all out-of-state customers, add language to her contracts regarding immediate service cut-offs, and institute automatic checking account and credit card payments to reduce non-payment risks even more. Better yet, she felt relieved and in command of her business again.

The dreaded phrase: 'I can't afford to pay you'

This column would not be complete if I didn’t address the question that startup business owners really fret about. They ask, "Susan, what should I do when my customer says they can’t afford to pay my bill right now?"

If the business relationship is a new one, business owners have to be suspicious. Assuming there was no fire or other catastrophe, business conditions don’t often change overnight. Either the business owner knew of the company’s poor financial condition at the time of service agreement sign-off or the customer is testing a young company’s collection resolve. Either way, business owners should activate the anti-procrastination collection plan.

One of the few viable reasons for a payment slow down is if a final bill comes out much higher than the original quote. In this case, owners should press for payment of the original quote amount and then agree in writing the timing of final payment.

My grandmother always believed that unattended little problems soon become big problems. Too many unattended delinquent customers can quickly lead to financial hardship for the business you love. No dodgy customer is worth this high price.

About the author   Susan Schreter is a Seattle-area investment banker and venture-funding expert serving startup entrepreneurs and fast-growth company executives. She also teaches business financing and entrepreneurship at business schools, angel forums, and microfinance organizations in the United States and internationally. Write to Susan at susan@takecommand.org.