Tuesday, February 21, 2012
Ways to Prevent Late Payments From Customers and Reduce Your Bad Debts
By Leo Thomas
Running a successful business sometimes requires a constant injection of funds, especially when it is growing. However, when your customers or clients start dodging the payment of your invoices this can lead to business cash flow problems and in extreme cases can lead to a business becoming insolvent. So here are a few basic measures one can take to help control your customers when it comes to paying you.
This should be the first step before starting a relationship with any customer. Always sign an agreement with your customers stating that the payments will be received on time in order to avoid specified enforcement actions.
Try to get payments by cash or post-dated cheques in advance from your customers. This might seem a little bit difficult, but the major benefit is that you will be relieved of any collection problems. Furthermore, advance payments will free up cash more quickly for you to use as working capital and in other areas of your business.
Avoid risks by running a credit check on your prospective client/customer. A credit check basically involves going through the records of a customer's past borrowing and repayment history. This is normally conducted through the use of a credit- checking agent for a nominal fee. In short this is an easy way to identify a potentially 'poor credit- worthy' customer.
Provide Easy payment options
Rather than just accepting either cash or cheque payments from your customers, you may want to offer other easy electronic payment options to them. For instance, you can get them to pay by credit card or PayPal these days, assuming you gear your business up to use these facilities. Getting paid electronically saves you a lot of time and sometimes the money will show up in your bank account the same day the transfer was made..
Try motivating the customers to make their payments on time by offering small discounts for early or on-time payments. The discounts could be small percentage of the total due amount. Again this is a good strategy to keep the cash flowing in.
Levying interest on late payment
Yes you do have the right to levy interest on late payments, Make the customer aware of this legislation well in advance so as to avoid any dispute over it later on. If a customer is charged late payment interest once this may make them more prompt when making future payments.
Letter of Credit
This is a document usually provided by a financial institute giving a guarantee on behalf of the customer. It will generally state that if the customer is not able to pay the due amount in the stipulated time, you can claim the money from the guarantor who has issued the letter of credit.
The above collection strategies can be used on their own or in combination with each other. You may find that some suit your business more than others. They will hopefully help you free up any cash tied up in debtors and avoid any debts becoming bad and having to be written- off.
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