5 Steps for Preventing Overdue Accounts

Establishing relationships with clients and customers who have bad credit histories may cost you business. However, you can take steps to protect your interests. The following suggestions may help accounts get paid on your terms instead of your customer’s terms.

It’s always a good idea to obtain your potential customer’s credit report before you extend them credit. The reports shows historical payment data, bankruptcy records, any lawsuits, liens and court judgments against a company, and a risk rating that predicts how likely the person is to pay their bills. Even if your prospective customer has little or no credit history, running a credit report is still worthwhile because it will reveal relevant data such as bankruptcy filings, corporate records, fictitious business name filings, court judgments and tax liens.

Remember that if you limit yourself to only doing business with companies with spotless credit records, your pool of potential clients would be quite small! Unfortunately, you often have no choice but to do business with anyone who wants to do business with you. Yet even then, you don’t always have complete control of the terms of your sales agreements. The reality is that your biggest and best clients may want to be billed quarterly and then have 60 days to pay you. You certainly don’t want to cut off those clients.

While you don’t want to destroy any potential or established business relationships by laying down strict payment terms, you must take some control of your account receivables to avoid wreaking havoc with your cash flow. You’re not a bank, after all.

These five steps can help your cash flow without endangering it.

Step 1: Watch for new customers with a bad credit history. You can’t expect that a company or a person with a history of bouncing checks or paying their bills late will change their ways when dealing with you. If you must do business with the chronically late, lay down your credit rules early and firmly, and start the relationship off slowly. Keep the amount of product or services you offer a company with an iffy credit record to a minimum until they’ve proven themselves. And, no matter how much you need the business, never start doing business with another person or company until you have a signed contract clearly stating and agreeing to payment terms.

Step 2: Once you begin doing business, make sure you stamp (hand or electronic) your invoices with the date that payment is due to you. Don’t rely on the customer to look at the invoice date and add 30 days — or whatever your payment terms are — to determine the pay date.

Step 3: Offer discounts for early payment and add interest to late payments. A typical discount is 2-3 percent off the total if the bill is paid within 10 days of the invoice date. The maximum amount of interest that can be charged varies by state.

Step 4: Phone your clients and start trying to collect the day after a payment is due. Never wait! Let them know that you keep close track of your accounts receivable.

Step 5: Until a customer pays their bills, don’t do any more business with them. Do not bend on this rule – you’ll only cause yourself more problems and scuttle any chance of collecting what you’re owed. If you really want to keep doing business with a customer who owes you, insist that any new services they receive from you are COD — cash on delivery.

What if you can’t collect on payments due? Here are some effective ways to get paid by delinquent customers:

  • Maintain an accurate accounts receivable aging report.
  • Call as soon as a customer is late with a payment.
  • Don´t give your delinquent customers an excuse for not paying.
  • Send a letter clearly stating the consequences of further delays in payment.
  • Consider hiring a collection agency.
  • Use lawyers as a last resort.
  • Hire a “skip tracer.”
  • Get acquainted with your clients’ payment procedures.
  • If one of your debtors files for bankruptcy, consult a lawyer immediately and suspend all collection efforts.