According to Small Business Administration, two-thirds of businesses in the United States survive the first two years. The first few years are the hardest and failure rates are high. But why?
One of the biggest reasons is cash flow issues. In fact, according to a United States Bank Study, cited in Entrepreneur, 82% of businesses fail due to poor cash management. Cash flow refers to the amount of money transferred into -and out of – a business. Timing plays a role too: if you’re not receiving money on time to make loan repayments, your financial situation can deteriorate, fast.
As a small business owner, it’s not fun. It’s downright frustrating when you’ve completed the work, know the client’s satisfied, but still, have to chase for payment. It causes unnecessary anxiety as you have bills to pay and mouths to feed.
Thankfully, there are ways to solve this problem. Here are seven foolproof strategies for getting your clients to pay you on time.
A recent study by FreshBooks analyzed whether the wording of payment terms used for existing customers affected the time it takes to get paid.
The findings showed that politeness matters, with the use of a “thank you” and “please” increasing the percentage of invoices paid on time, by 5%.
It shouldn’t surprise you as a study conducted by Emotion found that showing gratitude and thanking new acquaintances contributes to building a fruitful relationship.
So, thank a client in the invoice and also after receiving payment. If you treat them well and show courtesy you’ll increase the likelihood that they’ll return the favor and pay you promptly.
The same study also highlighted that specifying exact payment time -i.e days as opposed to “net” – will get your clients to pay you quicker. Terms like “upon-receipt” are ambiguous and open to interpretation, while “net 30” isn’t always clear for customers who aren’t business-minded.
Regardless, sending a gentle reminder to a client before payment is due, also helps. As a freelance writer, I can’t tell you how many times I’ve sent reminders and received the payment that day. Sure, doing it isn’t always fun, but you have a business to run and any reasonable client will accept that; if they don’t then maybe it’s time you ditched them?
Receiving payment on time is as much about courtesy and specifying a payment time frame as it is about making it easy for your clients to pay you. Accepting online credit cards facilitates ease of payment.
Not only is it convenient for the client but it will speed up the payment process. For example, using FreshBooks you can connect to the payment gateway option: FreshBooks Payments.
There are no monthly or hidden fees and FreshBooks accepts payments from Visa, MasterCard and Amex. You can connect your FreshBooks account to FreshBooks Payments from an Invoice, or from the “Accept Credit Tab”. Stripe is another way to accept payments online. In fact, Stripe integrates with the FreshBooks platform.
Businesses do not only operate online. I attend a local market in my hometown in South Africa and I often don’t buy from certain shop owners because they only accept cash. I’m sure you can recall something similar as a customer or shop owner.
As a shop owner, it translates into a lost sale. Sure, you can discuss how to make payment via an internet transfer and let them pick up the goods later. But every extra minute the client has to think about the potential sale increases the chances they won’t buy.
The solution is to get paid on the spot using a credit card reader.
Reinforcement theory suggests that you can shape behavior through negative and positive re-enforcement. If any behavior leads to a positive outcome you’re more likely to repeat it.
Consider a scenario where a child pretends to be sick to miss school. The parent believes the child and lets him/her stay at home. The child’s behavior is now positively reinforced as he/she associates it with a reward. The child is more likely to repeat that behavior of pretending to be sick.
You can apply the same principles to getting your clients to pay you on time. How often have you started a relationship with a client only to find that with time they take longer to pay? It happens to many.
By giving your clients a reward each time they pay you on time, they’ll associate that action with the reward, and be more likely to repeat it. Rewards may include a discount.
The discount will vary depending on the scope of the project. If you’re working on a $10, 000 deal, for instance, offering a lower discount rate may be more viable.
If rewards aren’t working you can always penalize your clients by charging interest on late payments. Regardless, of whether you reward or penalize clients, it’s important to specify these details up front. Such specification establishes transparency and expectations from the start.
I’ve sent an invoice to a client before where I excluded the PO number. No biggie right? Well, it is when your client only responds a couple of days later saying that you need to include it. Your payment is now delayed. To make it worse, the client responds with even more questions.
Avoid these headaches by customizing your invoices. Here are questions to ask before you send an invoice:
If all else fails, one of the best strategies for swift payment is upfront payment. But, many small business owners are scared to ask their clients. Further many clients are reluctant to pay up front, afraid that you may take the money and run.
Here are a few pointers to help:
There’s no doubt that late payments are a nightmare. They cause cash flow problems and contribute toward business failure. But implementing these seven strategies will help you get your clients to pay you on time and eliminate cash flow concerns.
If you still can’t get your clients to pay you after implementing these strategies, then you need to ask yourself: Is the client worth the effort and anxiety?