This post will be made by Wisniewski & Mensing, LLP's CFO, P. Bear:
Yes, I am cute, cuddly, and have fluffy ears. But don't let that distract you from the advice I am about to impart to you.Businesses, large and small, struggle with their account receivables. Here are some ideas that are easy to implement to improve your cash-flow and reduce delinquent accounts:
(1) Try to get a deposit from your client at the time the contract is signed. Ideally, you should obtain a 50% deposit.
(2) If your customer is a company, have the owner of the company sign the contract in their individual name, in addition to signing in the name of the corporation. This can head-off problems down the road if the company runs into trouble, as you can then look to the individual for payment.
(3) In your contract, have the terms for payment no more than 30 days. Better yet, have the contract state that payment is due upon receipt of any invoice. If payment has not been received once it is due, call or send your customer a polite follow-up message. The longer an invoice remains past-due, the risk of delinquency rises.
(4) In your contract, make sure to have it say that you will charge interest for any invoice that is past-due. Usually, interest begins to accrue once an invoice is more than 30 days past-due. Typical interest rates are 18% compounded annually.*
(5) In your contract, have it say that the customer will be responsible for any costs or attorney fees that you might incur with any past-due invoice.*
(6) If you frequently deal with clients who are located in another state (or in your state but some distance from you), you can add language to your contract which fixes the location for any disputes that might arise. For example, if you are based in Philadelphia, PA, you can say that all disputes concerning the contract must be brought before any state or federal court situated in Philadelphia County, PA.*
(7) You might want to incentivize your customers to pay on time, by offering a discount of a few percent if they pay on time.
(8) If possible, establish the credit bona fides of your new clients. Have your customer fill out a credit application, where you ask them for their name, address, bank references, business references, etc. You can also run a credit report. For a business client, Dun & Bradstreet offer them. For individuals, credit reports can be obtained from Experian, Equifax, or TransUnion. Be aware that information (or the lack thereof) might not be in every provider's report. Also, when dealing with individual credit reports, you must insure that you comply with the Fair Credit Reporting Act. Before pulling an individual's credit report, it is recommended that you get the person's written permission.
(9) If you have a lot of repeat business, every couple of months or so, have your accountant create a report listing all of the business' clients from the past 6 months. You want to know how much you have billed each client during that time period and how prompt they were in paying their bills. For the clients that have been consistently late with their payments, it might be a good idea to either cut the client off in the future, insist on a larger deposit, or come up with other ways to insure payment, such as having them authorize you to bill their credit card.
*It is advisable to work with an attorney when modifying (or creating) your business' contract, to make sure that it the terms are clear and that it is enforceable.
