Obviously, you want to do everything possible to avoid bad cus- tomers, since one typical way in which they’re bad is that they pay with agonizing slowness—or they don’t pay at all. I’m assuming that most small business owners do thorough credit checks before accepting orders from new customers. It’s wise to request that new customers provide names of at least two of their current suppliers so that you can determine how they pay. Sending a standardized form to these suppliers should elicit a response within a day or two. You can also run a Dunn and Bradstreet (D&B) report on new customers (though these reports are not foolproof—we had a longtime customer fi le for bankruptcy even though their D&B report made them seem stable and reliable). D&B reports are available by telephone or online for a fee.
Ultimately, however, the challenge for most small businesses is not screening bad customers but managing good customers who, for whatever reason, don’t pay within a reasonable period of time.
Complicating matters, your competitors may have a more forgiv- ing collection policy than you do, making you wary of taking a hard line with customers. The last thing you want to do is turn a bill over for collection when it involves a longtime customer or one with whom you hope to build a long-term relationship.
As an alternative to taking a hard line or doing nothing, con- sider using the following seven–step slow–pay response.
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1. When payment exceeds 45 days, send follow-up copies of invoices on bright pink or red paper. We use this technique—bor- rowed from another small company we know—with our delinquent customers, and it is tremendously effective. Psychologically, the bright color suggests warning or alarm. It gets people’s attention.
Similarly, we make sure that the word invoice can be seen through the envelope, so that it catches their attention even before it’s opened. We’ve actually had some customers request that we stop sending them invoices on this red paper—my suspicion is that it makes them feel guilty for paying so slowly. Many slow payers aren’t bad people who are trying to cheat you. Sometimes, they just aren’t particularly prompt in anything they do, including pay- ing bills. In other instances, they are paying slowly for a reason, usually related to fi nancial problems. Sometimes, this “scarlet letter” approach is all that’s needed to draw attention to the prob- lem and cause them to pay on time, motivated by guilt or embar- rassment or conscience. In still other situations, one person at the customer’s company is responsible for slow payment—that person is lazy or disorganized or believes that slow payment is good busi- ness. This technique often alerts others in the company to the problem, causing them to speed up payments.
2. Make a meaningful call after the second notice goes out because payment has not been received. Too often, meek, weak, meaningless calls are made to customers with no effect. Typically, you assign a clerical person to make the call, and this individual either doesn’t talk to the person responsible for signing a check or is intimidated by the customer. Therefore, make sure that someone with fi nancial responsibility in your company talks to someone with fi nancial responsibility at the company in ques- tion. We reserve one week per month in which our controller and accounts receivable clerk call late-paying customers. They are not rude or overly aggressive, but they are fi rm and make sure custom- ers receive the message that we expect payment immediately.
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3. Have the owner phone the most diffi cult or recalcitrant payers. Some customers don’t believe you’re serious about col- lecting the money due until the owner personally makes a call.
Psychologically, a CEO’s or owner’s call tends to carry more weight than one made by the controller. A number of individuals I inter- viewed also noted that their voice on the phone can frequently prompt a customer to start paying.
I realize that these calls can be tough for some of you to make and that some owners may feel guilty about “bothering” a cus- tomer. I understand that guilt—I always feel that way for the fi rst few calls. Then I remind myself that I fulfi lled my part of the bar- gain—I supplied them with good product, at a fair price, and on time. Therefore, a call to determine when they intend to make good on their part of the bargain seems perfectly reasonable.
When you call, make sure to give your name and title right off the bat. Next, ask when you can expect payment. If you don’t receive a satisfactory answer, ask to speak to the controller, and if that person isn’t available, ask for the owner. Sometimes, noth- ing happens until two owners speak, despite the best intentions of your employees.
4. Create your own de facto fi nance charge. When you complain about slow payments, you may receive a letter from a customer along the following lines: “Our corporate offi ce has informed us that they will now be paying all invoices in 60 days rather than 30.” You can react by informing them that your cor- porate policy is to be paid within 30 days; if they refuse to comply, increase your prices by 5 percent. In this way, you cover whatever interest you lose through the slow payment. You’ll also fi nd that very few customers will protest this small increase.
5. Offer an incentive for fast payment. Let me qualify this step by emphasizing that I don’t recommend offering an incen- tive for fast payment of money already due. You don’t want to set
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a precedent in which you have to renegotiate the original deal in order to get paid. On the other hand, you might suggest that customers will receive a 2 percent discount on their next order if they pay within ten days.
6. Hold orders or withhold service until payment is made.
Because it might be ill received by the customer, it’s best to use this tactic sparingly and selectively. If you have a valued, longtime customer who falls behind, you probably owe it to them to exhaust every other possible avenue to collect what is owed before taking this step. In addition, if you’re dealing with someone who is arro- gant or has a short fuse, this tactic may result in their turning your hard-line policy into an excuse to fi re you.
Perhaps the best time to use this approach is when you believe a customer is paying some suppliers promptly and some slowly. In other words, they’re taking advantage of certain suppliers because those suppliers allow them to take up to 60 days. When my com- pany stopped entering orders for one customer who was extremely overdue on several invoices, we were holding $10,000 worth of business from being put into work. This made this customer’s pur- chase agent upset, but he also understood our rationale. He knew (though we didn’t) that his company was going through a major restructuring and had poor cash fl ow during this time. As a result, they were stretching out payments to certain suppliers to deal with their cash-fl ow problems. When we withheld their order, though, the purchase agent urged the owner to pay us quickly, and as a result, they not only paid us but abided by the 30-day rule.
7. Use a collection agency recommended by others. Some collection agencies are incompetent or mediocre. Others are aggressively bad and can cause more problems than they solve. The last thing you want to do is fi nd a collection agency that uses strong- arm tactics to the point that a customer fi les a complaint against you with the local business bureau or tarnishes your reputation.
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Look for an agency that has produced satisfactory results for other business owners you know. Ask them if they have been able to collect on accounts that they had given up on—the ability to squeeze blood from a stone is a valuable one. They should also work on a 17 to 25 percent fee basis.