If you find yourself in a cash flow crunch, one of the first places you should look is your accounts receivable (AR). 

This is money already owed to you by customers—you just need to get paid faster. Fortunately, there are several proven ways to work around this problem. 

Here are nine ways to improve your accounts receivable collections process.

1. Charge a late payment penalty

Institute a policy in which late-paying clients will incur penalty fees for every day, week, or month they’re late in settling their bill. 

Not only will this encourage clients to pay in a timely manner, but it will also help you cover the cost of any financing used to “bridge the gap” for the period in which they were late in paying you.

Just know, you cannot add a surprise late payment penalty to current customer bills. You can only legally charge late fees if notice has been given on the original contract or invoice. 

To add late payment penalties, you may have to renegotiate payment terms, wait until the next payment period, or until the contract is up for renewal. 

Wording your late payment terms

Your late payment terms must be clear, indisputable, and easy to understand. They should be included in the terms section of your contract and every invoice you send. 

Here’s an example of what your late payment terms can look like: 

It’s best practice to also verbally review the terms with every customer to avoid any confusion. If payment is not made on time, send reminders of the additional penalties before they incur to avoid damaging customer relationships. 

If they still fail to pay, then follow up with a late payment letter that includes: 

• •Original payment terms
• •New payment total (including interest)
• •Products/services provided
• •A new due date
• •A copy of the original invoice

How much interest to charge on unpaid invoices

A 1-2% monthly fee on late payments is considered to be reasonable for most businesses. You can also set a scaling fee, where it increases by an additional 1-2% after a certain period of time.

Ultimately, what you charge depends on the products/services you offer and how effective the late charge is at encouraging timely payments.

2. Incentivize early payments

A potentially more customer-centric collection strategy is to offer offer early payment discounts. 

Here’s an example: ‘2/15 net 30 days.’ In this case, the final due date is 30 days after receiving the invoice, but a customer can receive a 2% discount if they pay within 15.

In this case, the customer pays part or all of the invoice before the due date, which yields cash earlier in the receivables process. Fortune 1000 companies are notorious for paying early and then asking for a 2 percent (or similar) discount.

Similar to late payment terms, it’s in your best interest to include early payment terms in every contract and customer invoice. 

Rather than the customer requesting a discount, you present the option up front—meaning you set the timing and the price. Ideally, you have them agree to the discount as well, so you aren’t guessing when cash will come in and can optimize your accounts receivable management.

6 tips for establishing a “discounts-for-faster-payment” policy

• •Assess how the discount rate will impact your profitability. You do, after all, still need to make money on the sale.
• •In addition to considering all your direct costs, be sure to also take into account all relevant indirect costs (including a percentage of your commercial rent/mortgage expense, IT expenses, management salaries, and other administrative expenses).
• •Make your discount meaningful so it is attractive, but know that if it is too high, you will compromise your ability to run a profitable business.
• •Talk to your accountant or financial adviser for help in determining what kind of discount you can comfortably give.
• •Revisit discount policies from time to time; they don’t need to be offered forever. Hopefully, their good payment behavior will stick once firmly established.
• •Consider establishing unique incentives on a case-by-case basis for large and/or special existing customers.

3. Secure a deposit

Another way to collect payments upfront is to secure a deposit and offer a payment plan. In this case, you don’t get the entire payment but can at least secure part of the total and then get the rest over time.

If you’re selling a product, the deposit should be enough to cover the direct costs (COGS) of production for what you deliver. If you offer a service, typically anywhere from 20-50% of the total cost is a reasonable request. For long-term engagements, you can also ask for the first month up-front and then set recurring payment dates for the following months. 

Just like the first two items on this list, the required deposit should be clearly referenced in your payment terms. At a minimum state what the total deposit will be and when it will need to be paid.

4. Expand your payment options

Make paying you easier by expanding the payment methods you accept. 

For example, if you only offer cash, debit, or check payments consider expanding to credit cards. 

You will incur a payment processing fee. However, instead of waiting on cash, you secure all orders upfront with the understanding that you are authorized to charge the card upon delivery of the product or service.

If you already offer credit cards consider expanding to:

• •Digital wallets (Ewallets) such as Apple Pay, Google Pay, Venmo, Cash App, and PayPal.
• •Bank transfers
• •Buy Now Pay Later services

Review competitor payment options and speak with your customers before expanding. More than likely, you don’t need to offer every method of payment and can prioritize those that your customers will use.

5. Factor them

You can sell current outstanding invoices that are less than 90 days old to a factorer, provided the clients that owe you money are businesses or institutions and not individuals.

You will receive a cash advance with a typical maximum advance amount of 80 percent of the total receivable. As the borrower, you’ll pay the interest and fees on the advance.

6. Get a collections agency involved

Yes, this is playing hardball, but if you have invoices that are more than 90 days past due and you don’t think they will be paid, you can sell those receivables to a collections agency. 

You’ll get pennies on the dollar, but at least it’s something. Just remember that sending a customer to a collections agency can negatively impact your relationship with them. So, be sure to exhaust all communication and payment incentives before pursuing.

7. Contact a Business Reporting Bureau

You can report those egregiously late paying customers to a business reporting bureau and make the complaint public record (the biggies include Dun & Bradstreet, HSBC Business Credit USA, Experian, and Equifax).

Because this sort of complaint threatens the client’s reputation and may limit them from getting credit in the future, most business clients will pay you immediately to get this blemish off of their business credit report.

8. Pursue an asset-based loan

This is only an option for business owners who have outstanding receivables. 

It’s an affordable line of credit that has no ties to the business owner’s personal credit score and can be repaid at any time on or before the maturity date without any penalties.

It can be used as needed up to a maximum amount, and that maximum loan amount is tied to the company’s average 90-day receivables balance. Interest is due only on the funds that are drawn down, not on the maximum loan amount.

Tip: Don’t rush to pursue this type of loan if you’re suddenly burning through cash. Instead, proactively research and explore your lending options before late paying customers become an issue. This will ensure you receive favorable payment terms and help you avoid bringing on unnecessary debt.

9. Drop bad customers

If, however, you are consistently waiting to collect from the same customers time and again, it might be time to embrace the philosophy, “fish or cut bait!”

If certain customers are always seriously late (past due 90 days or more—you know who they are), does it make sense to continue doing business with them? It may go against the grain to turn down business, but in cases like these, don’t be afraid of dropping that customer.

Honestly, maintaining a relationship with a routinely delinquent client is doing your business a disservice. When you’re waiting months for invoices to be paid, your business is being short-changed.

Consider the following scenario:

If you are waiting three months for a $5,000 invoice payment, that is capital that you do not have available to reinvest in your business. 

If you sell goods and/or services for a profit, the cost of not having the cash from that customer payment on hand is likely much larger than the amount that delinquent customer owes you.

If, for every $1 of inventory that you buy, you can sell the finished product/service to a customer for $2 within 30 days, then an outstanding invoice for $5,000 could actually mean $30,000 in lost/delayed sales income ($10,000 per month!) over that 90-day late period.

Is keeping that late-paying customer worth losing that kind of income?

I’m guessing your answer will be a resounding, “No, it is definitely not worth it!” If that’s the case, cut bait. Lose the customer.

If however, the answer is yes, the customer is worth holding on to, you can give them incentives to help them change their ways and pay faster. One of the most popular incentives is offering discounts for good payment behavior.

It’s the nature of starting a business. You simply can’t afford to wait for delinquent receivables to come rolling in. 

Manage your cash flow

A steady flow of cash is necessary for businesses to grow and pay for operating expenses. When that flow is slow due to unpaid bills, one of the above approaches can help to keep things moving.

Let’s face it—your business won’t grow if your customers aren’t paying you as they should. 

As we’ve discussed, there are plenty of accounts receivable process improvement ideas you can implement. Not all will work for your business, but the right methods will motivate those lagging behind to pay up—and ultimately, you can always choose to “prune” customers to improve your business’s financial health.

The key to implementing these faster payment strategies? Regularly reviewing your financial performance. 

• •Look for trends in your accounts receivable and cash flow.
• •Forecast the impact on cash if you were to bring in payments faster.
• •Create a high-level performance dashboard that alerts you of key issues or opportunities early on.

If you don’t have any financial performance tracking in place, download our free cash flow forecast template. It’s enough to get you started and make you more aware of how healthy your cash flow really is and if you need to explore speeding up customer payments.