Eight Steps to Getting Paid on Time
October 9, 2017
Having a system in place to ensure that invoices are paid on time is one of the easiest and most effective ways to prevent cash flow problems. A company can avoid late-paying invoices and the problems associated with them by following the eight steps outlined in this article.
- Have a contract that establishes payment terms
Not having a well-written contract can backfire if things go wrong and a company needs to take legal action. For every sale, use a contract with a clear, well-written payment and collections section.
- Follow a client’s payment guidelines
Alternatively, large builders and commercial clients may require that the sale use one of their standard contracts. In this case, review the contract and understand the payment terms section. When the time comes, follow the client’s specific payment instructions. If they require that invoices and copies be sent to specific addresses, such as a site and the main office, then do so. Many payments have been delayed by weeks simply because the proper invoice submission procedure was not followed.
- Establish effective invoicing and follow-up strategies
An important part of getting paid on time is having the proper invoicing and follow-up strategies. These strategies need to be followed regularly. Discipline gets a company paid. As said in step two, follow the contract’s invoicing guidelines to the letter. Then, follow up a few days later to confirm that they received all the invoice paperwork.
If the invoice has not been paid, contact the client a few days after the due date. If payment is not forthcoming, renegotiate a new payment date and follow up again as needed. Finally, identify and resolve disputes early. However, a company should be able to minimize disputes by using an acceptance notice (step six).
- Get a commercial credit report prior to making the sale
The easiest way to avoid a collections problem is to sell only to clients who pay on time. The most effective way to do this is to get a commercial credit report on a client before making the sale. The report provides enough information to determine if the client can afford to buy the products and if they will pay on time. Clients with bad credit should not be sold to on terms. Otherwise, they will become collections problems. Credit bureaus include Dun & Bradstreet, Ansonia and Experian.
- Get a credit application
Every so often a company will encounter clients who don’t have a credit report. This does not mean that their credit is bad. It just means that the credit bureau does not have enough information to make a recommendation. A company can still check the credit of the client by asking them to provide four customer trade references. Call these references and ask if the prospective client has a good payment record. Keep in mind that this method can be biased because clients will always provide their best references.
- Use an acceptance notice
Commercial disputes are a common reason that invoices are paid late, or not at all. One way to minimize this risk is to use a delivery acceptance notice. The client signs this notice once the products and services have been delivered. Be careful and consult a lawyer to determine the best language to use. Companies should send this letter with the initial invoice, as it can prevent disputes and misunderstandings from developing.
- Put a reporting notice on all invoices
Most medium and large companies have a commercial credit file, as mentioned in step four. Their credit profile is crucial to them because it allows them to get term credits from vendors and institutions. A simple way to ensure they pay on time is to put a notice on invoices that states, “we report payment experiences to commercial credit bureaus.” This alert increases the chances that a company will be paid on time, as most companies want to keep their good credit. A company can find how to report credit data at the website of each credit bureau.
- Give early payment discounts
One effective way to get paid early is to offer clients a discount if they pay within 10 days. The size of the discount varies and is negotiable, but a 2 percent discount for a 10-day payment is common. However, offer this discount selectively. Some companies are known to abuse the offer by paying late and taking the discount. For a detailed explanation and strategy regarding early payment discounts, see my column on page 16 of the October 2015 issue of Glass Magazine.