How many times have customers come to you, received quality service and products, then left without paying a dime? You expect them to pay you on terms within maybe 15, 30, 45 days? It’s whenever you agreed upon with the customer at the time of sale. You were, in fact, financing the customer’s purchase.
For a short duration, you are the lender, and they are the borrower, and you are funding the sale of your products and services to the customer. How do you determine which customers are credit worthy? How are you deciding what a customer’s borrowing terms should be?
These are critical questions for entrepreneurs so we are starting a blog series that will help guide business owners on how to avoid bad debts. We know how important it is in any industry that customers pay on time for services and products they purchase. The timing of your cash flow depends on it. We know that your employees, the tax man, the bank, and the electric company aren’t going to wait for 15, 30 or 45 days for you to pay. So when you extend payment terms to a customer there needs to be a payment policy in place so that both parties understand what is expected in the transaction and so that your monthly cash flows are not disrupted.
One of the best actions you can take to help customers pay promptly is to put your expectations in writing. Start by developing a written payment policy.
Developing a written payment policy can help avoid potential confusions, prevent errors in the timing of payments, and keep customers honest. Before you provide any services or goods having clear billings and contracts with your customer will help them understand what they are responsible for paying and when. All documents regarding the transaction should contain language clearly explaining what the products and services provided are and what the payment amount(s) and due date(s) are. These records will make discussing the transaction and managing the customer’s account easy because you and the customer will have accurately documented what the charges and due dates are at the time of sale. Your customer will appreciate this, and you will be thanking yourself because both parties can clearly see what was agreed upon in the transaction.
In your written payment policy you should consider some concrete policies that will help ensure timely customer payments. When you decide to institute these types of rules, clearly write them into your payment agreements, fee disclosures, and contract language:
- Consider implementing a late payment policy. By including your late fee policy language in your contract or payment policy disclosures, you are educating your customer and setting expectations for timely payment. There should be a late fee included to motivate customers to make on-time payments. Most customers will naturally want to avoid paying late fees so they will pay on or before the due date. Also, consider best practices for your industry on how much and what type of charge the late fee should be. It is not uncommon to charge a flat fee but some industries charge a percentage of the total bill when payments become delinquent; 2% to 5% is not uncommon.
- Consider having a good-faith deposit or down-payment policy. Many businesses find it prudent to ask customers to pay a percentage of the total purchase upfront. Requiring down payments can be helpful in increasing a customer’s psychological commitment to paying the total amount owed. Additionally, these policies can help business cash flows when you are delivering a product or service that has upfront business costs. It also ensures you at least receive something in exchange for your initial time and efforts.
- If appropriate consider creating an interest charge and payment policy. The advantage of charging interest and offering payment plans is that it allows businesses to benefit from the extension of credit to customers rather than seeing it as a burden on cash flows. But before charging and collecting interest, it’s important to do your research when developing your policies.
Federal and state laws regulating the collection of interest on debts make it necessary to review that every transaction is lawful, that way you can avoid debt forfeiture issues and hefty fines. An excellent place to begin your research is by checking your state’s usury laws at usa.gov. Furthermore, it would be wise to seek legal counsel and have them review your policies and credit forms. That stated there are some significant benefits to creating an interest charge and payment plan policy.
One of the benefits of charging interest and offering payment plans is that it helps develop a secondary stream of income on transactions. The next benefit is that it creates a reward for taking on the risk of extending credit to customers. Also, by including interest charges and payment plans in the extension of credit, it may make it possible to increase sales transactions. Customers who would normally not be able to afford the full payment on your products or services may now be able to afford them on a payment plan. A customer credit program could ultimately stimulate revenue growth for your business.
We hope that you find these payment policy suggestions helpful and informative. And when you have debt collection issues and need someone on your side, or maybe you want a better understanding of how you can recover bad debts, know that Burt and Associates is your go-to expert. Please feel free to contact us today through our website, email, or by phone. Our representatives are available to help you today.