Once you’ve completed a service or delivered a product, the expectation is that clients will pay you promptly and in full. However, as any business owner knows, overdue payments can become a big problem if you don’t take steps to avoid and reduce them.
If you’re dealing with overdue payments in your service business, or want to find out how to prevent late payments, keep reading.
Communication is key when it comes to dealing with late payments. The first step to avoiding late payments in the first place is to send an invoice as soon as the service is over. Your invoice should clearly state when the payment is due (e.g., within 30 days), any penalties for late payments (e.g., interest charges), and how/where clients should submit payments.
Tip: Include specific dates in your invoice, e.g., pay within 30 days (April 2nd, 2023), so clients can visualize a due date without having to count it out on their calendars!
If it’s nearing the end of your stated payment window, consider sending a payment reminder 24 hours before the due date. Reminders are particularly effective if you have a late payment penalty, as clients will appreciate the reminder to help them avoid additional fees.
If your payment window has passed and the client still has an outstanding balance, the next step is to contact them to find out the reason behind their late payment. It may be that they forgot or that they were away. However, in some cases, it may be necessary to negotiate a payment plan or devise an alternative payment option that works for you and your client.
If, despite your timely payment reminders and trying to contact the client, the payment is still outstanding, it’s time to take steps to enforce payment. Legal action, such as engaging collection agencies or lawyers, should be a last resort, as this can be a costly option for your business. Instead, try sending a demand letter first to resolve the late payment.
Best practices suggest sending a demand letter 30 days after the payment due date. If you have the client’s address, send a physical letter and use a shipping method that requires proof of delivery. If you only have an email address, send the letter via email with a read receipt attached.
One of the best ways to deal with late payments is to prevent them from happening in the first place. The easiest way to avoid overdue payments is to use an appointment scheduling software like MarketBox that lets you charge clients upfront or store their payment information to be charged later.
Online booking options with integrated payment processing are an easy and convenient way for your clients to organize their service appointments and ensure that you don’t have to chase a late payment again.
If you don’t want to use online payment processing services, or your current booking system doesn’t support it, consider adding a penalty for late payments to deter clients. Depending on the value of your services, the penalty could be a fixed cost or interest that accrues daily until the invoice is paid.
If you’re finding that late payments are a recurring issue in your service business, learning how to manage the aftermath is essential. To start, you need to evaluate the impact of overdue payments. For example, are the late payments preventing you from paying your bills or processing payroll on time? If so, can you build up a bigger cash buffer or access a business line of credit to cover the period between payments?
As a last resort, it might be necessary to stop working with repeat offenders altogether if their regular late payments cause you too many headaches!
With some pre-planning and improved communication, you can prevent late payments in your service business, and when the odd overdue payment does occur, you'll have policies in place to address it.
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