Stipulate rules up front so customers pay bills on time

Published 9:00 pm Thursday, April 5, 2007

Getting slow-poke customers to pay their bills on time – or reasonably on time – can be a vexing problem for a small business owner. Besides creating cash-flow issues, late payments can be a waste of time and energy if it takes phone calls and e-mails to get a customer to finally send a check.

Business owners who have struggled with the problem have a variety of ways to deal with the problem, including educating customers about payment terms, insisting on a substantial deposit before work begins and hiring someone to keep after foot-draggers.

Some business owners have found that unless they’re very clear at the beginning about payment terms, customers may take their time. It’s human nature to put things off, and all of us have to prioritize what we use money for. But if a company states from the get-go: “Here is how we need to be paid,” a customer is more likely to get the message.

Dana Korey lost time and productivity at her professional organizing business trying to collect on invoices weeks or months after they were sent out. Korey, founder of Away With Clutter Inc. in Del Mar, Calif., said “being really clear about the deposit and being exceptionally clear about the day the balance would be due” turned the situation around.

Korey raised the deposit to 60 percent from 50 percent, and put payment terms in bold-faced type in contracts and had customers sign or initial every provision that dealt with payment. Employees also state the payment terms aloud during the contract signing process. “It actually has worked phenomenally,” she said of the changes.

The situation was even more critical at Gini Dietrich’s public relations firm. She said Chicago-based Arment Dietrich would have had to go out of business because of slow payments if she hadn’t implemented a payment policy, because its cash flow was so poor.

Dietrich said, “I wasn’t very good at asking for the money,” something that many business owners can identify with.

Her solution has been to require two months’ retainer fees up front, refuse to give discounts for early payments (many companies will shrug off the discount and pay later, she said) and insist on out-of-pocket expenses to be paid up front.

And, if an invoice is more than 45 days past due, work on the project stops immediately.

Carol Borow and Dan Venet say their slow-payment problems have been made easier because they have an employee whose duties including calling customers who haven’t paid yet. Borow and Venet, who own CHB Industries Inc., a New York-based provider of window film, don’t spend their time chasing late payments unless the situation really demands their intervention.

Borow and Venet, whose customers include construction firms, are to some extent stuck with the bill-paying practices of the construction industry. Other industries, such as apparel retailing, have their own customs that an entrepreneur often has to contend with.

Borow said CHB is often one of the last to work on a project, and so it’s often paid last. But Venet said the company has found some ways to speed up the process, such as talking to the end user – a building owner – who will then lean on the slow-paying construction firm.

Like other business owners, they’ve learned to get whatever payment they can before they start working.

“It’s often very helpful to make sure that payment terms are negotiated up front, and if you can get a deposit up front, that’s better,” Borow said.

Small-business owners who want to develop a payment policy have plenty of resources, starting with other company owners and their accountants. Talking to veterans of the bill-paying wars can help you figure out what kind of terms you want to institute.

But there are things you can do that go beyond contract terms. For firms that deal with other businesses, having a good relationship with open lines of communication can help. So if you or one of your top employees needs to prod your customer for a payment, the phone call will be a reminder not only of the obligation that needs to be met, but also of the fact that there’s a good relationship that needs to be preserved.

And, remember, sometimes customers don’t pay because they’re unhappy with the job. Having good communications can help head off that problem.

Joyce Rosenberg writes a weekly column on small-business issues from the Associated Press.