Maintaining Business Cash Flow When Customers Won’t Pay

As a small business owner, maintaining healthy business cash flow is essential to keep your business running smoothly. Late payments, however, are a problem many business owners are facing in the current business climate and customers who won’t pay are causing significant business cash flow problems to business.

If you’re faced with outstanding payments or debtors who won’t pay, it’s essential to take action to minimise your bad debt levels, maximise your chances of being paid and have strategies in place to minimise bad debt and outstanding payments in the future. In this article, we’ll give you 5 strategies for ways to help retrieve fast business cash flow and deal with customers who won’t pay and provide you ways you can prevent bad debt in the future.

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Step 1: Send a Reminder Promptly After the Due Date

If a customer hasn’t paid by the due date, it’s important to send them a reminder.  From a process point of view, this is a good strategy for cash flow problems and solutions accounting.

Your reminder should be sent promptly after the due date to let them know that their payment is overdue. This can be done via email or phone call but it’s a good idea to follow up with a written reminder if you reach out by phone. 

What you’re seeking with this first step is engagement.  If you don’t receive a response in a reasonable timeframe it could be a red flag your customer is experiencing cash flow issues themselves, might not be in a position to pay or is deliberately avoiding payment.  You want to follow up promptly in an effort to rule these out.

Step 2: Make Contact with the Person Responsible for the Debt

If you’ve sent a reminder and still haven’t received payment, make personal contact with the person responsible for the debt.

This can be done over the phone or in person but try and go to a person of influence within the business that owes you money. Try to maintain the relationship and form an agreement about when payment will be made. 

If you secure a commitment for a payment plan of your unpaid invoice make sure you confirm that agreement in writing summarising the amount to be paid and date it’s to be received.

Step 3: Send a Letter of Demand

If your debtor avoids personal contact or doesn’t make an agreement to pay by a certain date (or makes that agreement and doesn’t honour it) the next step is to send a letter of demand for payment. This is a formal letter that lets the customer know that legal action may be taken if they don’t pay the debt. There are a number of templates online for drafting letters of demand but it might be appropriate to seek the guidance from a solicitor if you haven’t used these before.

 Step 4. Take Legal Action

If all else fails, legal action may be necessary for debt recovery. This can be expensive and time-consuming.  Weigh the cost of legal action against the amount of the debt before you go down this path. 

An alternative approach at this point could be to engage a debt collector.  With the costs of debt collection you’ll be forced to write off a portion of the money you’re owed but this could be a more pragmatic approach than a legal process. 

If you’re not sure on the right approach for you, seek advice from a solicitor.

Step 5. Access Working Capital or a Cash Flow Loan

Many businesses expect a certain amount of bad debt and have working capital facilities to support them through periods when faced with late payments or customers who won’t pay.   Solutions can be in the form of a line of credit, trade finance, invoice finance (also known as debtor finance or factoring), or alternative financing options like private loans.

The right working capital facility or cash flow loan will be tailored to your business and credit rating.  Even if only to be used as a backup to your day to day operations we recommend you seek access to the credit you need at a time when you’re not under pressure from customers who don’t pay.  Business cash flow problems can make it harder to access credit and can make the credit available more expensive.  Many of our commercial lending clients keep an unsecured overdraft without line fees for this circumstance.

Steps to Minimise Bad Debt in the Future

Preventing bad debt is key to maintaining healthy business cash flow in the long run. Here are some steps you can take to minimise business cash flow problems in the future:

Know who you’re dealing with

When taking on a new customer make sure you capture and verify their business information.  In their advice on verifying customers ASIC includes the following steps:

• check if the business name or company is registered
• find out who holds the business name
• search ASIC’s registers, and
• ask more questions until you’re confident.

Take Deposits or Progress Payments for Large Work

If you’re doing large jobs for customers, consider taking deposits or progress payments. This will help you cover your costs while the work is in progress and reduce the risk of bad debt if the customer doesn’t pay at completion.

Have a Contact Plan for Customers Whose Invoice Is Nearly Due

Our clients who have a contact plan that reminds their customers their invoice is nearly due, they report having significantly less issues with late payments or non payments compared to a time in their business before they implemented this strategy. 

As an example of what you could do; our clients have used a reminder email the week before and the day before the invoice is due.  This lowers the chance your invoice has been forgotten and can create the expectation your invoice will be followed up promptly as it establishes who is responsible if the customer will not pay.

Credit Check Customer

The unfortunate reality is there are customers out there who simply shouldn’t be given payment terms or need to pay upfront for products and services because of their poor payments in the past.  Before extending credit to a new customer consider doing a credit check as part of your business process to reduce business cash flow problems in the future. This will give you an idea of their payment history, identify any serious issues and potentially address problem debtors before you start work.

If your cash flow needs support from a working capital loan you can talk to an expert about your needs by contacting us here.

Please note this article is general in nature and not meant to be taken as advice.  You should seek professional advice about your personal and specific circumstances before taking action.