Running a business is personally satisfying for many entrepreneurs, but waiting to get paid certainly isn't. A majority of small businesses face this problem, according to multiple surveys.
Nearly two-third of small businesses have a late invoice at any given time, meaning that the average small business owner is waiting an extra six days to get paid, said Monica Mehta, managing principal at Seventh Capital. Late payments mean a majority of entrepreneurs aren't able to pay themselves on time, and nearly one-fifth wouldn't be able to invest in their own businesses.
"That becomes a domino effect into the future performance of their business," Mehta said.
Here are three tips she shared to attract and keep paying customers.
Know who you're working with
Entrepreneurs can typically check a smaller business' credit report, to see if they have a history of delinquent payments. Mehta noted, however, those who purposely pay late are often larger clients, because they know that the smaller entrepreneur needs their business.
"It's important to consider what their incentive is, and the kinds of obstacles and roadblocks that will cause for you when it's time to collect," Mehta said.
Set up incentives and follow up
The longer an invoice is outstanding, the lower the chance that it will ever be paid in full. An invoice one month late has a 94 percent chance of getting paid, while an invoice six months late has a 58 percent chance of getting paid. But an invoice one year late? A mere 27 percent.
By negotiating the terms of payment plans early on, entrepreneurs can give customers incentives to get ahead of the problem. Customers can be asked to make advance payments, follow consistent collections processes or make small, incremental payments towards their invoice. One popular approach is the 2/10 rule, meaning that a customer can get a 2 percent discount for paying within 10 days.
Set up creative and easy payment processes
For younger clients, sending invoices through email instead of postal mail can speed up the payment process by two or three weeks. Similarly, setting up electronic payment systems or accepting PayPal or credit cards can smooth out bumps in the road.
Businesses dealing with slow payment processes can also consider partnering with factoring companies, which purchase accounts receivable at a discount. The small business gets immediate funds, while the factoring company gets a small fee once the customer finally pays the invoice.
Perhaps the best approach of all this is to pull the plug on business relations with late-paying customers before they start at all.
"Frankly, doing no business is better than doing business with someone who is not going to pay you," Mehta said. "That's actually going to cost you more."