Small businesses often find themselves in cash flow crunches that could easily be solved if only clients would pay their bills faster. Fortunately, there are many ways to work around this problem. Here are seven ways you can turn unpaid client bills into cash when those accounts receivable simply aren’t being paid quickly enough to meet your working capital needs.
1. Factor them
You can sell current outstanding invoices that are less than 90 days old to a factorer, provided the clients that owe you money are businesses or institutions and not individuals.
You will basically receive a cash advance with a typical maximum advance amount of 80 percent of the total receivable. As the borrower, you’ll pay the interest and fees on the advance.
2. Charge a penalty
Institute a policy in which late-paying clients will incur penalty fees for every day they’re late in settling their bill. Not only will this encourage clients to pay faster, but it will also help you to cover the cost of any financing you had to get to “bridge the gap” for the period of time in which they were late in paying you.
3. Offer discounts
When you offer a discount for early payment, some customers will pay ahead of the due date, which yields cash. Fortune 1000 companies are notorious for paying early and then asking for a 2 percent (or similar) discount. It’s a great way to keep the cash flowing. (To see a visual example of what cash flow looks like within a business, download our free cash flow example here as a PDF or an Excel sheet.)
4. Secure orders with a credit card
Whether it’s a product or service-based order, you can secure all orders up front with a credit card with the understanding that you are authorized to charge the card upon delivery of the product or service.
Voilà—immediate payment. And this can be affordable for “micropreneurs” or “solopreneurs” who can secure reasonable credit card payments by using apps such as PocketSuite.
5. Get a collections agency involved
Yes, this is playing hardball, but if you have invoices that are more than 90 days past due and you don’t think they will be paid, you can sell those receivables to a collections agency. You’ll get pennies on the dollar, but at least it’s something.
6. Contact a Business Reporting Bureau
You can report those egregiously late paying customers to a business reporting bureau and make the complaint public record (the biggies include Dun & Bradstreet, HSBC Business Credit USA, Experian, and Equifax).
Because this sort of complaint threatens the client’s reputation and may limit them from getting credit in the future, most business clients will pay you immediately to get this blemish off of their business credit report.
7. Pursue an asset-based loan
This is only an option for business owners who have outstanding receivables. It’s an affordable line of credit that has no ties to the business owner’s personal credit score and can be repaid at any time on or before the maturity date without any penalties.
It can be used as needed up to a maximum amount, and that maximum loan amount is tied to the company’s average 90-day receivables balance. Interest is due only on the funds that are drawn down, not on the maximum loan amount.
It’s the nature of starting a business that entrepreneurs simply can’t afford to wait for delinquent receivables to come rolling in. A steady flow of cash is necessary for businesses to grow and pay for operating expenses. When that flow is slow due to unpaid bills, one of the above approaches can help to keep things moving.
Fish or cut bait
If, however, you are consistently waiting to collect from the same customers time and again, it might be time to embrace the philosophy, “fish or cut bait!”
If certain customers are always seriously late (past due 90 days or more—you know who they are), does it make sense to continue doing business with them? It may go against the grain to turn down business, but in cases like these, don’t be afraid of dropping that customer.
Honestly, maintaining a relationship with a routinely delinquent client is doing your business a disservice. When you’re waiting months for invoices to be paid, your business is being shortchanged.
Consider the following scenario:
If you are waiting three months for a $5,000 invoice payment, that is capital that you do not have available to reinvest in your business. If you sell goods and/or services for a profit, the cost of not having the cash from that customer payment on hand is likely much larger than the amount that delinquent customer owes you.
If, for every $1 of inventory that you buy, you can sell the finished product/service to a customer for $2 within 30 days, then an outstanding invoice for $5,000 could actually mean $30,000 in lost/delayed sales income ($10,000 per month!) over that 90 day late period.
Wow. Is keeping that late paying customer worth losing that kind of income?
I’m guessing your answer will be a resounding, “No, it is definitely not worth it!” If that’s the case, cut bait. Lose the customer.
If however, the answer is yes, the customer is worth holding on to, you can give them incentives to help them change their ways and pay faster. One of the most popular incentives is offering discounts for good payment behavior.
Tips for establishing a “discounts-for-faster-payment” policy:
- Assess how the discount rate will impact your profitability. You do, after all, still need to make money on the sale.
- In addition to considering all your direct costs, be sure to also take into account all relevant indirect costs (including a percentage of your commercial rent/mortgage expense, IT expenses, management salaries, and other administrative expenses).
- Make your discount meaningful so it is attractive, but know that if it is too high, you will compromise your ability to run a profitable business.
- Talk to your accountant or financial adviser for help in determining what kind of discount you can comfortably give.
- Revisit discount policies from time to time; they don’t need to be offered forever. Hopefully, their good payment behavior will stick once firmly established.
- Consider establishing unique incentives on a case-by-case basis for large and/or special existing customers.
Let’s face it—your business won’t grow if your customers aren’t paying you as they should. If you choose to offer payment incentives, the good news is that you should be able to remove the incentive once a track record of good payment is established. Better yet, one day you might even be able to command late fees of those customers who don’t pay on time.
As we’ve discussed, there are ways to motivate those lagging behind to pay up—and ultimately, you can always choose to “prune” customers to keep your business healthy.
This article was originally published on Bplans in 2015. It was updated in 2019.