What do you do when your customers don’t pay their bills? With so many companies singing the financial blues these days, it’s happening more and more often.

While I’ve yet to find a single, brilliant collection solution, there are a number of effective strategies worth trying. Different customers respond to different approaches (some react to carrots, others to sticks), so think flexibly and customize your approach.  

While collection agencies and lawsuits are always options, they’re expensive and often ineffective. Plus, they always end up costing you the account. Before you go there, consider these do-it-yourself alternatives.

• If you have a good relationship with the client, sit down and have a heart-to-heart. Perhaps you can set up a workable payment schedule or are willing to “get a haircut”—i.e., take something off the top. After all, something is better than nothing. And if you value the client’s business, this will earn you big-time loyalty.

• Go directly to the source: The person who cuts the checks. Is it more effective to “badger them or love them?” In other words, does that individual respond well to charm? Or will you have to wear him/her down with persistent phone calls? Most people have a limited tolerance for nagging, so while it’s not pleasant to do, it can be effective. 

• If your client is having cash flow problems and you accept credit cards, suggest he/she transfer the balance and pay you by credit. Then, delinquent payments become the client’s problem, not yours.

• If you think the customer has cash but needs a nudge, offer a discount for immediate payment. Look at it this way: you’ll offset that 5% or 10% discount with all the time and energy you’ll save in collection activities.

• Get creative. For example, can you barter with the client—i.e., take your payment in product or services rather than cash? Can you recover the unsold merchandise as a way to reduce the bill? Going forward, can you sell on COD or consignment to protect yourself while retaining the client?

• If you need to take a tougher stance, use whatever leverage you have. For example, if an overdue client wants to place a new order, you might explain how you’d love to accept it, but you need to get paid first. Or accept the order…then sit on it. When the client inquires, explain you’re awaiting payment to release the order. It’s okay to make them sweat when they owe you money.

When dealing with delinquent accounts, always assess your leverage. Is your product readily available? Does the client need the product immediately in order to satisfy its customers? These can determine how you apply leverage, which is one of the most powerful tools you’ve got.

Avoid Future Problems

If you set solid ground rules from the start, you can avoid many future collection problems. Start by creating standard payment terms. State them clearly in writing, either on an order form or in a contract agreement. Review the terms with new customers, and have them initial that section of your contract, even if it’s little more than a memo.

In addition, set credit limits for each account. Ask yourself: How much can you afford to risk on this particular account? What is the quality of its credit? If a customer places second or third orders before playing the first one off, at what point does this become risky for you?

Many small firms are so eager for large, ongoing accounts, they rarely allow themselves to gauge their exposure. Slow down and access what your limits are; then have the guts to enforce them.  

Or again, think creatively. Instead of punishing delinquent customers, how about rewarding good ones for their on-time payments? One way to avoid collection issues is to set up such a reward system, like granting a 2% rebate for four consecutive on-time payments. (You’ll have to build the reward into your up-front pricing structure, of course.)    

The bottom line is, collection is an unfortunate but important part of running a small business. To keep your business healthy, you need to stay on top of your payables. If you can do that AND keep your accounts, then you’re doing it right.

Biography

Ray Silverstein is president of PRO:  President’s Resource Organization, a network of entrepreneurial peer advisory groups in Phoenix and Chicago. The author of “The Best Secrets of Great Small Businesses” and a columnist for Entrepreneur Magazine online, Ray may be reached at 800 818 0150  or www.propres.com.