A small business owner will inevitably confront the situation where a customer is not paying up, and having to start thinking about collection management. Every business needs to have a contingency plan on how to handle the situation in the most efficient way to ensure business is able to collect their receivables as close to 100%.
Some Warning Signs When a Customer May Not Pay
A customer may be avoiding payment if you receive part payments, they ask you for extensions or they do not return your phone calls or emails. Or when he becomes more aggressive and unusually difficult or criticises your work.
Perform Some Checking
Ask some of his other suppliers if they had been paid. Visit the business premise if it is closed unexpectedly and where feasible speak to staff to inquire if they have received their salaries on time and whether there is a high staff turnover. Conduct a background check on credit history and reference checks.
Review the terms of your contract with this customer and consider your debt recovery options.
How to Handle When Customer Does Not Pay
1. Talk With Your Customer
The first thing to do when you are not paid is to contact and talk with your customer. Many a times it could just be a case of oversight or misunderstanding and the situation rectified easily. More serious will be a dispute on the service or product delivered. More often than not, after a thorough discussion of the issues, an amicable solution can be reached to the satisfaction of both parties.
The worst case scenario is when a solution cannot be found. Or the customer’s business is in difficulty and unable to pay up or just the customer thinks he could get away without paying.
In such difficult situations ensure all communications are in writing. Send reminder, overdue or final notice letters.
2. Get External Assistance
A letter of demand from a law firm or informing them you intend to outsource to a debt collector could illicit a prompt and swift response.
If the customer is not paying owing to a dispute consider getting the service of dispute resolution service.
3. Taking Legal Action
If all fail you may have to consider taking legal action to recover the debt. You need to consider whether it is worth your time and money in pursuing the payment which may outweigh the invoice worth.
Report the non-paying customer to a credit-monitoring organisation. This could warn others of the risks of doing business with them.
Revisit Your Cash Flow Plan
Whilst the first instinct is to act quickly to get the customer to pay up it is equally important that you also review the impact on your business if the invoice is not paid or if the payment is delayed.
A client’s failure to pay can have an impact on your business. Once you suspect a customer particularly a significant customer may not be paying up it is crucial that you review your business cash flow. Will you have sufficient funds to meet your business obligation like paying upcoming salaries, rental and your creditors? If indeed there is a gap in the cash flow then it is incumbent on you to quickly act to resolve the situation.
Alternative Finance to increase working capital
If you already have a line of credit with a Bank you could approach your bank to increase the loan limit. Sometimes this approach may backfire as the Bank with this information may trigger a review of your company’s risk rating and your business suffering a downgrade which may affect your current loan facility.
If your business does not already have a bank line of credit it is usually too late to apply for one as it takes weeks if not months to get a loan approved with a bank.
What other ways are there to plug this gap in the cash flow?
Fortunately nowadays there is available alternative to the traditional banks to finance your business such as to help raise your working capital and overcome such cash flow problems. The West has seen staggering growth in alternative finance especially in the UK and USA. But Australia is fast catching up as well as in countries like China, Singapore, Hong Kong, and most recently Indonesia, Malaysia, Philippines and India.
Invoice Financing via a Fintech
Alternative financing is fast becoming the clever substitute to banks in supporting SME’s financing activities. One such way is Invoice Financing via a Fintech. It is the selling of a business trade receivable at a discount to a third party in return for immediate cash. The Fintech is able to reach a pool of ready investors who will put in their money for a small return. The advantage of Invoice financing through a Fintech over banks is that banks usually require you to finance your entire ledger and the facility is disclosed to your customers. It will usually take weeks to get the facility approved with the banks. However with the Fintech you can apply and get approval in a matter of days and you decide which invoices to sell and when to sell it to optimise your cash flow. And there is absolutely no cost to you if after signing up there is no further need to trade your invoices.
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