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How to handle debt and get paid faster

You started your own business to make money. So it’s important you know how to get paid – you don’t want to end up spending half your time chasing up people who haven’t paid.

The more money you have flowing through your business – a healthy cash flow – the better position you’ll be in to grow as a business. Customers who don’t pay on time affect almost every small business. That’s why a reliable credit management system and clear payment terms are essential – the sooner you get one set up, the faster you’ll be paid and the more cash your business will have.

It can be easy to overlook managing your debtors when you first start your business. But credit management is important for avoiding bad debts and maintaining a healthy cash flow.

Understanding debt collection

No-one wants to be a ‘debt collector’ – the phrase has negative connotations. Most small business owners cringe at the thought of calling customers and demanding payment. To avoid this, get your credit management system set up as soon as you can, and you’ll reduce the risk of late or non-payers. Your main goal is to have cash coming in faster than you have to pay it out.

Know exactly how much you're owed

This is where good accounting software is essential. It means you can easily find out exactly how much customers owe your business at all times. Along with customer details, you can often set up your invoicing system so that:

  • Automated reminders let you know when a customer is late, so you don’t forget.
  • You can keep track of customers’ payment histories, giving you more to go on when you are thinking about changing their credit terms.
  • You are not at risk of extending them extra credit when they still owe you money.
  • You can take fast action if you need to.

Talk to your accountant about the best software for your business. Ideally, it will be one that’s compatible with the systems they use.

When you've got to run credit checks

You know the old saying – prevention’s better than a cure. You can reduce the risk of chasing up an unreliable customer by doing some simple checks in the first place. So the first thing you need to do is gain permission for a credit check, and then follow through on it. Equifax is a good online resource for doing this.

Beyond credit check results, other signs of a potentially tricky customer could include:

  • Large orders – exercise caution when fulfilling large orders for a new customer. You’ll expend time, money and resources fulfilling it, which will all go to waste if you wind up not getting paid. If you do decide to accept the order, ask for a deposit or progress payments, and make sure you’ve checked their credit rating.
  • Don’t rely on one big customer – it’s safer to have a number of smaller customers instead of one large one. Customer diversification is important to small businesses.
  • Don’t be a target – shady customers who’ve been blacklisted by other businesses may target you as their next unpaid victim. Again, credit checking is essential.

Structure your terms of trade

Once you’ve decided to offer credit terms to a customer, they need to accept your terms of trade. It’s really important that they understand them, and that they sign an agreement to this effect. Part of that agreement should be how they’re going to pay you. Ideally, you should offer them a range of payment options to make it easier for them to pay you, including:

  • Credit and debit card
  • Cheque
  • Online and mobile payment options

We have a range of payment solutions available. Our Merchant Services are provided by Worldpay (UK) Ltd, and include a Pay By Link option. This is really useful for small business owners who are sending out invoices and extending credit terms, because you create secure, personalised payment links which allow your customers to pay invoices quickly and conveniently, improving your cash flow.

It's also important to set credit limits and stick to them. They are designed to stop debt escalating out of control. First, put a credit limit on all your customer accounts then put an automatic ‘stop credit’ on any overdue accounts – your accounting system should have a feature that allows you to do this.

Automate debt collection

Phoning or emailing your customers may have once been the best option to ensure you got paid, but these days the right automated system can instantly invoice your customers and set up reminders. A quick phone call still has its place, but think about setting up a direct debit to automatically collect payments. This could be part of the terms of trade agreement between you and your customer.

Summary

The more robust your payment and credit systems are, the less your chances of having to chase up debtors. Always run credit checks, and when you decide to offer credit, make sure your terms of trade are clear and signed off by both parties.

Offer a range of payment systems so that your customers always have options. You could even encourage early payment by offering a discount.

Always take action in the same way regardless of which customer is overdue. If you are finding problems with a certain customer, aim to fix the problem early because the sooner you chase the debt, the faster you’re likely to get paid.

 


This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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