Small businesses can level the playing field. Use these tactics, get paid faster.

In this two part series, we share tactics to shorten business payment cycles that plague growing companies.  Though this was written with small businesses and startups in mind, all businesses should follow these best practices for fast customer payment and improved cash flow.

fast customer payment

Slow paying customers are particularly damaging for startups that have to pay their vendors and operating expenses prior to invoice payments.  As startups hit new stages of growth, larger customers provide larger revenue opportunities at the cost of extended and delayed payment terms (see highlighted red box below).

fast customer payment

For venture-backed startups, inability to get paid on time, leads to accelerated burn and premature fundraising, which can lead to sub-optimal valuation.  For bootstrapped startups, inability to predict cash flow leads to liquidity traps and, ultimately, failure.  82% of business failures are attributable to poor cash flow management (U.S. Bank study).

UPFRONT DUE DILIGENCE WILL ENSURE TIMELY PAYMENTS AT THE START OF NEW CUSTOMER RELATIONSHIPS

#1: Understand payment terms before new business

  • In the euphoria of securing a new customer, startups often become hyper-focused on booking the deal at all costs.  Small details, such as payment terms, are often overlooked
  • No matter how fast the new deals come together, you should always pause and negotiate manageable payment terms before final signing
  • Don’t assume because industry standard is Net 30 that new customers will honor this.  They may push for Net 60 days or include obscure clauses that can delay service completion indefinitely
  • Keep this in mind for existing customers too.  When you transition from smaller deals to larger deals, companies can often slip-in longer payment terms on new contracts

#2: Know the complete process to get paid

  • Every customer has a different invoice payment process.  Sending the invoice is not always enough.  Customers need to verify the service has been completed and the payment amount is correct
  • Ask what are best practices to ensure timely payment and adopt these recommendations in your own process
  • When working with a customer for the first time, be sure to include your W9.  Failure  to provide can result in delayed payments
  • If you don’t take this process seriously, you will learn the hard way that even the smallest mistakes can result in delaying payment an extra 15-30 days

WORKING HARDER THAN OTHER VENDORS WILL GET YOU PAID FASTER THAN OTHER VENDORS

#3: Invoice promptly after service completion

  • Customers don’t start the “payment clock” until invoice is physically entered into their systems
  • Setup share drive folders where all the different business units can share key customer order information.  Invest in add-on software that automates data population
  • If your customer is required to provide you information for invoicing, setup automatic email reminders so you don’t delay requesting it
  • If your customer is unresponsive, document your attempts to make contact and argue this shouldn’t be held against you when determining the “payment clock” start date

#4: Start chasing payments weeks before they are due

  • Your customer’s AP department may not have the bandwidth to approve your invoice for payment until right before it is due
  • This means you need to pro-actively engage with your customer’s AP department to ensure timely payment
  • A good rule of thumb is three to four weeks in advance for large payments and two to three weeks for smaller or recurring payments
  • Many vendors do not have the organizational capabilities to follow-up consistently.  Use this to your advantage to get paid before them

NON-TRADITIONAL STRATEGIES CAN ACCELERATE PAYMENTS IF YOU ARE WILLING TO “BUY-IN” & COMMIT TO THE PROGRAM

#5: Use early-pay discount to your advantage

  • 2/10 Net 60 is a common example.  If the customer pays you within 10 days, allow a 2% discount off the payment amount.  If not, full payment is due within 60 days
  • Many startups push back on early-pay discount, citing margin loss.  What these companies fail to realize, however, is margin does not pay the bills, CASH does
  • Stipulate early-pay discount is only available if the customer makes payment on all your other past due invoices (aka “clearing house”)
  • Renegotiate your vendor agreements to also include an early-pay discount for when you pay them

 

Part II of this series is now live.

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Depending on the industry, long payment terms can simply be a cost of doing business.  If you’re interested in learning about how Harper can enhance your company’s cash flow, give us a call at (310) 817-0376 or fill out our contact form!