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Tip: How to Encourage Clients to Pay on Time

Tip of the Month

June 2016

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Tip: How to Encourage Clients to Pay on Time

Clients who are slow to pay cause real problems for firms that provide them with products or services. They create more work for your staff and jeopardize mutual goodwill. If you are running a small business, slow payments can seriously disrupt your cash flow and threaten your firm’s livelihood. Here are a few effective tips that encourage prompt payment and minimize any possible damage to client relationships.

  • Always get it in writing. Regardless of whether the client is an old colleague or a family member, have a written, signed contract that sets out your billing rates, practices and policies. This should include an agreement on what constitutes prompt payment, discusses out-of-pocket charges and defines what penalties may be imposed if payments are not made promptly.
  • If payments are late, figure out where the problem lies. Ask your client what the problem is, and how you can help find a solution. Find out if there are some simple fixes that will get your invoices reviewed and paid faster. If the client has inexperienced staff, ask if you can help them understand your bills better. Encourage your clients to call to discuss any issues or questions rather than delaying processing. Ask what you can do to improve your procedures and you’ll encourage your clients to do their part to improve their efficiency.
  • Consider using incentives, like discounts for prompt payment, but be careful not to sell your services short. Be equally willing to apply disincentives, too, if you believe this will be more effective. Some clients pay more attention to the possibility of penalties.  
  • Make sure your billing/invoicing is easy to understand and process. Accept automated paperless payments and offer several options – credit card, scheduled bank account payments or PayPal. Online payment systems can be convenient for both the client and your company. And, as an added bonus, online payments can be set up to send automatic reminders to the client until the account is paid.
  • Do your clients tend to require the same amount of goods or services each month? Would it make sense for you and your client to agree to a monthly retainer, or a recurring billing cycle? You will want to clarify what the retainer includes and come to an agreement on how overages will be tracked and billed.
  • Ask for an upfront partial payment from new clients. This works well in situations when the company (seller) is embarking on a project for a client that will require the company to pay workers and suppliers for the duration of the project.
  • If you are going to spend significant amounts of your firm’s money on out-of-pocket expenses (e.g. travel costs) and vendor purchases (e.g. raw materials) on behalf of clients, you should have an agreement in place that allows you to pre-bill or submit separate out-of-pocket charges for speedy settlement. Few factors may jeopardize a company’s bottom line faster than extending credit to a client in the form of paying significant out-of-pocket purchases on their behalf. Set a dollar limit on the amount you are willing to carry for each client. If you prefer to NOT carry these charges, work out an agreement to have major out-of-pocket expenses and vendor fees be billed directly to the client.

Decide which ideas will work best in your area of business, but avoid doing nothing. If you are expected to meet your clients’ deadlines and needs then you have the right to expect prompt payment for your goods or services.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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