Get late-paying clients to pay on time.

• Author: Siciliano, Gene

With the current "credit crunch," clients may find paying their bills to be challenging. In the following article, a practitioner offers guidance on encouraging clients to pay promptly.

Most business owners don't realize how dependent they are on credit to run their businesses. Vendor open-account credit, the kind extended to clients, is by far the largest source of borrowing power in our economy. When we sell our products and services on credit, we are making interest-free loans to customers, even if we are financing those loans with a bank loan for which we pay interest every month. When collections roll in on time, it all seems to work out nicely; but when collections slow down, we still need to replace goods sold, pay employees (on time), and pay the rent and all other expenses. Assuming our bank credit lines are in place and our margins are adequate, we have a bit higher interest expense, and we can ride it out with our customers. However, if our credit lines or cash reserves are not sufficient to cushion us from the sudden change in cash flow, our businesses could be in big trouble. Besides, most bad debt write-offs come from old balances, not current ones. The older the balance the higher the risk that it will never be collected.

So the best bet is to encourage customers to pay on time. The question still is, "How do we do that exactly?" The following five ideas can work well.

1. Improved credit-granting practices

   On the front end, screen new customers more closely before granting a credit line. Spend a few dollars getting a credit report and a few minutes calling a couple of their credit references to get a sense of the relationship they have with their creditors. The conversation might extend to their payment patterns when the economy slows, which could be different from good times. A comment that "they sometimes struggle to keep current but they always manage to get caught up" could be a red flag these days. Also be watchful of a prospect who has changed suppliers more than once in the past year. If you can learn the name of a previous supplier, ask about their experience with your customer.

2. Committed collection effort all the time

   Make collection follow-up a key duty of at least one person in the organization. Don't make the mistake of giving the job to the controller to handle in his or her spare time just because the accounting team handles the money. Most likely he or she doesn't have any spare time and, besides, accounting...