Small-business adviser: Handling late payments — and avoiding them

What is the best way to handle late payments from a customer? How can I speed collections?

The proven way to handle late payments is to avoid them. This begins by developing a comprehensive credit policy and then implementing it from the start.

Before extending credit to new customers, qualify them and verify their creditworthiness. Consider a banker’s expectations when lending to you.

First, ask your customer to complete a credit application containing all the information you need to both bill and follow up with the customer. The application also should include the owners or officers of the corporation, credit references and banking information. This sets the stage for implementing a collection process in the event the customer fails to pay.

The critical next step is to verify the information. Only then should the customer be authorized for an open account sale. Approval limits and terms should be set and understood from the start and reviewed periodically.

Even creditworthy customers may delay in making payments, so it is important to execute your pre-sale and collections process consistently. The collections process begins, after the sale, with timely accurate billing followed by timely and accurate application of payments. Thereafter, a weekly aging of all unpaid balances in 30-day increments is suggested. Any invoices over 30 days (assuming net/30) should result in consistent action by phone or mail.

An initial courtesy call might ensure the customer received the invoice and is happy with the product. Be polite and considerate, but make certain they understand you expect to be paid within your standard credit terms. Document when payment can be expected, then follow up immediately if payment is not received. Taking an active, rather than passive, approach is proven to get results.

You might consider a payment plan before turning an account over to collections. The credit authorization and collections processes should share real-time information and never be administered by the sales department.

When it becomes obvious the customer is not going to pay, forward the account to a collections specialist. Collections agencies should be screened well in advance and can be a valuable resource. They should know applicable laws regarding collections and they don’t get paid unless they collect.

Response by Robert Kolich of the Kansas Small Business Development Center at Johnson County Community College. Send your small-business question to dvestal@kcstar.com.