As a small business owner, cash flow is often tight and you need to get paid on time. But, unfortunately, late payments are an all-too-common pain point, throwing a wrench in overall business operations.
While it’s your customer’s responsibility to pay you within the agreed-upon timeframe, if you’re experiencing late payments on a consistent basis, you may want to evaluate how you’re structuring or communicating your invoices.
Below are some simple improvements that could help increase the chances that you’ll receive payment on the day it’s due.
Include all necessary information.
This seems obvious, but make sure you understand what information your customer needs on the invoice upfront.
Here are some questions to ask ahead of time:
- Do they need a purchase order (PO) number?
- How detailed should your service descriptions be?
- Do they require an Employer Identification Number?
Knowing what to include on the invoice before you send it will save you time and resources later on. View more possible invoice details here.
Be polite and professional.
Don’t underestimate the power of the invoice note—FreshBooks claims it can increase the amount of invoices paid by 5%! Always thank your customer for their business upon submitting an invoice, and request that they “please” pay the invoice on time. A personal touch never hurts either, if applicable: try noting something specific that you enjoyed about working with that customer.
“Thank you for your business—we had a blast building Sparky’s play pen! We hope to work together again! In the meantime, please submit your payment within 21 days.”
A pleasant invoice note will motivate your customers to promptly complete payment.
But use very clear language.
Understand that not all customers are invoice experts. For example:
- Business jargon such as “net 30” is often too vague for the average customer, leaving them in the dark as to when you expect payment.
- “Due upon receipt” is unrealistic and leaves the deadline essentially open-ended to the customer.
Instead, say that payment is due within 30 days. The word “days” sparks a countdown in your customer’s mind, creating more urgency and awareness around your deadline.
Placing your logo and customizing the colors of your invoice to match your company’s aesthetic makes your invoice look more professional. This can go a long way in getting your customers to take your invoices more seriously. But sure you keep it clean and simple so as not to distract from the intention of the invoice!
It’s easy to do this yourself in a word processor, but cloud-accounting software options like Quickbooks or FreshBooks also offer simple customization options, including adding your logo.
Allow slightly less time to pay.
Common payment deadlines hover around 30 days, but that number is relatively arbitrary. Cutting back your expected payment date will prioritize your deadline in the mind of the customer. FreshBooks recommends 21 days as the magic number, but others have tried even less time with great success.
If this sounds scary to you, negotiate with the customer ahead of time to settle on the most efficient payment due date. This strategy will steady your cash flow, and prevent overdue payments.
Provide incentives and penalties.
Another way to improve cash flow is to offer a small discount for early payment. For example, provide a 1.5% discount if paid within 24 hours. Of course, make sure you’re financially comfortable enough to scrape that off the top!
On the other hand, charging a fee for late payments will motivate your customers to pay on time. But PaySimple says not to overdo it: “$10 per week late payment fee won’t increase your bottom line, but it’s a sufficient amount to encourage your customer to pay on time.” Just make sure to be up front about the late free from the very start—you never want a customer to receive an unwelcome surprise.
If you’re really in a bind waiting for unfulfilled payments, you can looking into invoice financing, which lets you get paid for your outstanding invoices right away—for a fee.
Late-paying customers can be a huge drain on your resources. But keep in mind that you don’t have to accept that as just a “part of doing business.”
You are entitled to prompt and complete payment for your products and services, and there are plenty of gentle and helpful ways to reach that goal that don’t have to involve ruining relationships with your customers. And, of course, always know that you have legal recourse available, but hopefully, by using the tips above, you’ll never need it!