Finding clients used to be the most challenging thing about running a small business or freelance operation. However, that challenge has been surpassed by the struggle to get paid by clients. Even one unpaid invoice for the month can lead to problems covering expenses or even getting a paycheck. Now, double those late payments by five or ten invoices and see how quickly your credit and business stability are impacted.
While it's nice to think that every client will respect the fact that you were on time with work that they will return the favor, the reality is that many companies are late paying their vendors or freelancers. Here are some strategies you can employ to take the pain out of late payments:
1. Maintain Steady Cash Flow
As bad as it may sound, you should plan for late payments. The more you account for that possibility in your budget, the less painful it will be each month should some clients decide to delay their payment. That means ensuring your cash flow always exceeds your monthly expenditures.
By keeping your expenses lean and saving as much as possible in the bank, late payments don't become such a stress. You'll be able to tap into that financial cushion until the invoices are caught up.
2. Utilize Positive and/or Negative Reinforcement
The jury is out on which type of reinforcement is best. There is a lot to be said for both, so you'll need to try a few different types of reinforcement to see which one inspires clients to catch up on their payments. And, it may differ from client to client. For positive reinforcement, you can clearly state on each invoice that a small discount will be applied to every invoice that is paid on time or earlier than the due date.
Alternatively, you can opt to charge a late fee that sends the message that you are punishing the client for not sticking to the terms of your agreement or contract. Remember to also put these late fee terms on the invoice. Another negative reinforcement tool is to simply hold the work you produced for the client until they pay you.
3. Have Honest, Proactive Discussions with Clients
Nothing is more critical to dealing with painful subjects like late payments then clear communication. Don't be afraid to proactively approach your clients about payment. Be friendly and send reminder emails with an additional copy of the invoice. If nothing has changed, it's good to pick up the phone and ask if there is anything you can do to help expedite the payment.
No matter how you feel, keep it professional and courteous. It could be an honest mistake where they thought payment was made. Be sure to keep a paper trail of all the communications, noting dates and conversations, as well as keeping copies of emails should it escalate.
Persistency in checking in with each client that has a late payment should eventually pay off.
Also, remember that clear communication should start at the beginning of the client relationship. That means before you start any projects, discuss your payment terms and the expectations on when you will be paid. Make sure each client understands and agrees to those terms. It is best to get this agreement in writing. This approach formalizes the relationship and provides a basis of evidence should any action be taken at a later date.
4. Provide More Payment Options
Your clients are in business just like you. They may be waiting for payments in order to turn around and cover your invoice. If you have only given them the options of cash or check, then you may not be helping yourself with the pain of late payments. Instead, consider adding other payment options that give your clients more flexibility.
Consider adding credit card payments, eCheck processing, ACH payments, social payments, and even digital currency, if you feel comfortable with that payment option. These other types of payments allow your clients to better control their cash flow, which may motivate them to pay you on time.
5. Consider Invoice Factoring
Another option to consider to lessen the pain of late payments is accounts receivable factoring. This is a good strategy to use if and when absolutely necessary (e.g., when you are short on cash). You sell your accounts receivable (invoice) to a company for a certain percentage of what they are worth. In return, you receive the proceeds within a few days. From there, the company will collect your customers' payments and send the balance of those invoices to you. Out of it, they only take a fee to provide this service.
The only thing to remember is that they may not want to purchase your invoices after they conduct credit checks on your clients. Plus, if you are doing this for multiple clients with late payments, those fees will really add up, not making it worth your while.