Businessman fingers pointing to the payment bill overdue.

10 Ways to Improve Collections and Cash Flow

If you manage accounts receivable (AR), you will be all too familiar with the usual excuses for non-payment. The check is in the mail, my manager is away on vacation, and we sent a payment to you last week; these are just a few tactics people use. In most cases, customers who use these excuses are merely stalling for time and eventually pay.

Of course, there may be a valid reason for non-payment, such as faulty products or a business disaster. But suppose there is no good reason to delay the payment. In that case, what do you do when a customer refuses to pay their invoices or tells you they don’t have the money? Here are ten possible courses of action when customers won’t pay their invoices.

1. Don’t Wait

You could elect to wait and assume that the customer will eventually pay. However, playing the waiting game is unlikely to work. If the customer believes you have stopped trying to recover the money, they will forget the debt and move on. If you have delivered the goods or service, you have every right to expect that you will be paid. So, delaying action is not generally advisable.

2. Escalate the Matter

If you are dealing with a business, your contact might be a bookkeeper or accounts payable (AP) clerk. In that situation escalating the non-payment to a more senior person might get your invoices paid. In the case of a small business, contact the proprietor. You might need to work up the ladder with a larger organization, starting with the AP supervisor and ultimately going to the finance officer. You can usually find senior officers’ names on the company website. Alternatively, a search on LinkedIn might provide this information.

Related: How to Collect Overdue Sales Invoices Without Losing Your Customer

3. Suspend the Account

If the debtor is a regular customer, the first weapon you have is suspending their account. This action will at least get more people’s attention within the organization and possibly escalate the matter. And placing the customer account on hold will limit your exposure should the customer eventually go into liquidation or be declared bankrupt.

4. Charge Late Fees

Late fees on overdue accounts provide a further incentive to pay. But it is crucial that you advise the customer that non-payment is costing them money. It will also help to remind them of that fact every time further fees are added to the account. However, if the customer is experiencing genuine financial difficulties, late charges can be counterproductive. Piling on excessive late fees makes the debt more significant and challenging for the customer to clear. Consequently, it can sometimes help to offer to suspend or cancel late charges if the debt is paid within a reasonable timeframe.

Related: How Much Are Your Accounts Receivable Costing You?

5. Offer a Payment Plan

People and businesses sometimes experience temporary cash flow difficulties or over-commit themselves. Consequently, the debtor will be able to pay their invoices eventually, but not immediately. In this situation, spreading payment of the account over several months might result in full settlement of the invoices. If a payment plan is agreed upon, though, it would be advisable to suspend the supply of any further services or products to the customers. And you would need to monitor the account to ensure that customer makes the regular payments. It would also make sense to suspend late fees in this scenario, but only on the proviso that the customer sticks to the plan.

6. Accept Part Payment

There are occasions when the carrot will work better than the stick, and you might want to cut your losses and accept part payment in full settlement. Accepting a part settlement would avoid further collection costs and potential legal costs. And, if the business in question closed is wound up, or the individual goes bankrupt, you would at least recover some of your money before that happens.

7. Hire a Collection Agency

If the debt is more than 60 days overdue and the value is significant, you could opt to hire a collections agency. This approach can work because collection agencies employ more aggressive techniques than you might and will probably be more persistent in their efforts to recover the debt. Letters and calls from collection agencies also usually carry more weight. However, collection agency fees are significant. The average cost can range from 20-50% of the debt value.

If appropriate, factoring sales invoices can provide a boost to working capital. Rather than sitting on invoices and waiting to be paid, you send the invoices to a factoring company which gives you cash for the unpaid invoices and works with the customer to secure payment.

Related: How to Prevent Invoice Disputes Delaying Payment of AR Accounts

8. Threaten Legal Action

In some cases, the mere threat of legal action will be enough to get a delinquent customer to pay. Even if payment is not immediately forthcoming, threatening legal action will likely get the customer talking to you. It is best to raise the possibility of legal action with a written warning letter. Providing notice of impending action is the best approach. For example, state that legal action will be taken if the account is not settled within thirty days. Giving notice provides the customer with some time to pay and you with the time to keep up the pressure. However, if the time expires and you don’t follow up with legal proceedings, this approach will not work a second time.

9. Take Legal Action

If you have exhausted all other options, your remaining course of action to recover the debt will be to take legal action. If you have reached that stage, a business lawyer will advise you on the best approach to take. However, legal action can be expensive and time-consuming. Consequently, you would need determine whether this approach will be cost-effective.

10. Write Off the Debt

Sometimes, it makes no sense to continue pursuing a debt. For example, if the outstanding amount is insignificant, the cost of recovering it might be greater than the value of the debt. Or the chances of recovering the money might be so slim that further efforts will likely get you nowhere.

Related: 8 Significant Risks to Small Business Cash Flow

The Bottom Line

The above options are used when you have exhausted all the usual collection methods. It would be better, of course, to avoid getting to this stage in the first place. There is no way to guarantee that you will never have to deal with a delinquent customer. However, adequate credit checking of new customers and robust collection procedures will ensure that you don’t have too many problematic AR accounts.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.

Similar Posts