Question:
In the dozen years I have been in business almost all of my customers have paid me promptly. In the last year or two it has become very unusual for any customer to pay me in 30 days. Most take 45-60 days and quite a few take much longer. Many of these are regular customers. Eventually, after many calls most of them pay. It is causing my company to “slow” pay my suppliers as well. Do you have any strategies to help me when I talk to these customers or when I sell to them that will help get them to pay on time?
Response:
First, let me start by saying there are no experts in this area and there are no simple answers. This is a problem that, for some companies and some industries in particular, has existed at some level forever. The fact that you have started experiencing these slow pays more recently is probably just indicative of the economic times that we are all currently operating in. I am assuming that you have not changed your credit policy in this period in any way that would have given rise to slower paying.
Whether or not you have changed it, now is a good time to review your credit policy and make sure that it is clearly stated. You should also review your credit granting policies to make sure that they are not too lenient, especially given the current business environment. While credit policies should be periodically reviewed as standard procedures, it probably won’t help much here if that is all you do.
What you do need to do is address this issue with your customers before the sale is made and credit granted. Your bargaining power here will depend a lot on the nature of your product or service. If it is a commodity, i.e. it is readably available from other sources, your bargaining power is going to be limited. On the other hand, if your product or service is somewhat unique then you will be in a better position to set stricter terms. You may be able to get partial or full payment in advance. Perhaps you should offer a discount for prepayment. If each sale is big enough to warrant it, you might be able to get a note payable which will help in collecting interest if it is not paid on time. This would also make it easier to factor your receivables to help with your cash flow. Again, if a sale is substantial enough you might try to get a standby letter of credit.
Even if your product or service is of commodity nature and your bargaining power is limited, you should remind your slow paying customers that they are hurting their credit rating and that you will have to reduce or eliminate your credit to them if they cannot meet the agreed upon credit terms. You may also want to consider approaching your own suppliers to see if you can get extended credit terms given the current economic situation.
A very important aspect of this problem is your own cash flow position. This is the type of situation that can result in severely harming your business if not carefully monitored. Can you afford these sales? Are your profit margins sufficient to handle the extra costs associated with these late payments? Do you have credit lines available to handle this? Have you done cash flow projections? Are you in danger of getting your supplier credit lines reduced or eliminated?
Contributed by Tarsky, Zanchi & Associates, Inc.