Businesses need cashflow to run their operations, which they generate by providing a service or by selling a product. While most customers might be prompt with their payments, some may delay for a period of time. This could be difficult for businesses with tight cashflow to manage.
As the proverb goes, “prevention is better than cure.” We list a few ways that you, as a small business, can take to ensure that your customers pay on time and what you can do when they don’t.
Research The Client Before Working With Them
When you start out as a new business or even as a self-employed person (SEP) that provides services, you may be eager to take on any work that comes your way. This may lead to working with clients that are dubious or less prompt in their payments.
Therefore, you should do research on any potentially new clients before working with them. Find out if the client has a credible reputation, how long has the business existed for, and whether there’s any reviews of the working relationship with the prospective client.
Screening your new clients or customers in advance would help you to sieve out companies that can be trusted and those that may cause potential issues like non-payments.
Have A Contract And Charge For Late Fees
Businesses and SEPs may not think about having a formal contract beyond the scope of work required, particularly if they are working with clients based on recommendation or referral.
But, regardless of who the client may be, it is always better to have a written contract to address all legal concerns. This would be useful, especially where there’s a dispute over the working terms and agreement.
Some of the terms that can be included in the contract are: –
- Scope of work: that is required to be done.
- Payment schedule: what percentage and when will the milestone payments be for work done.
- Deadline: when the work is required to be completed.
- Late payment policy: fixed amount or interest rate charged if the invoice is not paid on time.
If you don’t wish to hire a lawyer to help you write your contract, you can search online for sample service contracts to make sure yours has all the important clauses.
Request Upfront Payment Or Structure For Progressive Payments For Work Done
This can be an extension of having a contract.
Businesses could consider asking for a deposit or a certain percentage of payment upfront depending on the industry norms. Such terms are not out of the ordinary and may even be common practice among SEPs as a form of retainer.
Having an upfront payment, regardless of its size relative to the contract value, may help to cover some of the costs and time spent on providing the service or work.
Alternatively, a progressive payment schedule may be a better choice for businesses if the work incurs high costs over a long period of time. This would allow you to not engage in more work without getting paid for what you have already done.
Send Invoice Early And Offer Early Payment Discounts
Another option that businesses could do to prevent late payments is to send their invoices to clients early. This may give more time for their customers to make the payments or source financing if required.
Businesses may also consider offering early payment discounts to entice their customers to make payment well ahead of the contractual requirements. For example, if a business has an outstanding payment of $10,000 that is due 30 days from receipt of the invoice, you could offer a discount of 2% (which is equivalent to $200) should the client pay within 14 days.
Additionally, businesses may also consider offering different payment options. This includes digital payment methods such as eGIRO, PayNow Corporate, and OCBC OneCollect that can help businesses collect payments from customers more quickly and easily.
Read Also: What Is PayNow For Business And 4 Reasons Why Businesses Should Adopt It
Businesses Can Seek Short Term Financing For Cashflow Needs
Certain customers, though they make good on their payments, might often pay late. This might affect your short-term cashflow needs.
One short-term financing option that businesses can consider is invoice financing. It allows businesses to pledge their unpaid invoices and receive a percentage of it upfront. The loan amount can be repaid once the invoice is paid by the client.
Additionally, businesses can also consider an OCBC SME Working Capital Loan to meet their cashflow needs if a customer were to delay their payment for longer than anticipated. This could also help them tide over the short term until the customer is able to make full payment.
Read Also: [2022 Edition] Complete Guide To SME Business Loans In Singapore
Stop Ongoing And Future Work
Some businesses may have concurrent work or projects with a customer. It may be better for the business to consider stopping work on any current or future projects that it has with the client.
While not ideal as it could affect the working relationship between the client and the business, this is one safeguard measure that a business can take to protect itself when its client starts to delay or not make payment on the work done.
Allow For Instalment Payments
If your customer has trouble paying, you may want to consider offering instalment payments. This may be applicable for long-time or trusted customers who may be facing cashflow issues.
Instead of losing the client’s relationship by discontinuing future work, you can offer to receive the outstanding payment over a reasonable period of time. Nevertheless, you should still set a credit limit for each client so that any payments that are still due don’t go over that limit, thereby containing your credit risk with that client.
Engage Debt Collectors Or Take Legal Recourse
As much as possible, businesses should try to mediate with their customers on repayment terms, which may result in a more amicable solution. But if that’s not possible, you may have to take other steps, like engaging licenced debt collectors or hiring a lawyer to go through the legal route for debt recovery.
Debt collection agencies would charge a certain percentage of the unpaid invoice and would follow up with the debtor company to ensure future invoices are paid on time. This may be a more cost-effective solution to recover your outstanding payments.
Alternatively, you could engage a lawyer, who would help to establish your right of claim by sending the debtor company a letter of demand. This could be followed by an out-of-court settlement or a bankruptcy proceeding against the debtor.
Read Also: What Happens When A Company Files For Liquidation (Winding Up)?
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