I saw a question on LinkedIn recently about ways to collect from your customers when they’re late. There were tons of answers, from outsourcing collections to showing up at their doors.
The problem with this question is that as a small business, you shouldn’t be collecting from your customers in the first place. Why should a small business finance another business? Even if it’s only for 30 days?
We used to have collections problems, but we modified our contracts, informed our customers, and now have almost no collections issues. Here’s what we did:
Like many small businesses, we have different types of customers. Ours are SMBs (Small and Medium Businesses), Large companies, and Consumers. We created different strategies for each of these.
SMB’s: Prepay Only
In some ways, SMBs are the biggest risk for us. They can run up big bills, and can disappear in a heartbeat. For them, we instituted a prepay only policy. They must either prepay the month in advance, or buy packages of hours for our services. If customers pay for a quarter or even a year up front, we give them discounts.
Large Companies: Retainers
Large companies, though much less of a payment risk, are notoriously slow to pay. I found it absurd that a tiny company like ours was financing these massive companies, interest free, for up to 120 days! With these companies, we now sign quarterly retainers. These retainers guarantee a certain SLA (Service Level Agreement). If the customer doesn’t use the retainer, they forfeit it. If they go over, they get invoiced for the difference. While we’re still financing them a bit if they go over the retainer, they finance us a bit too with the retainer so it evens out.
Consumers: Credit Cards
While consumers are sometimes at risk for not paying, they don’t run up huge bills. For them, we instituted credit card agreements. Essentially, we invoice them after we complete our services, and then automatically charge their credit cards for the balance. We lose quite a bit on credit card fees, but no longer spend time trying to collect from them.
These strategies worked great for us. We now spend almost no time collecting, which allows us to spend more time caring for our customers. Everyone’s happier. What if you have a few customers push back? That’s OK. You’re a small business, so you can always make exceptions. Do not, however, convince yourself that your customers won’t accept a change. No matter what your industry, if you provide a valuable product or service, your customers will adjust.
Have any good collections stories? I’d love it if you shared.
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I shook my head when I read this because I just received some snarky comments from a client who was pissed about their bill. I do collections because I have to. If I had someone or a company doing it for me, I would hand it over gladly. Also when starting out you don’t have the money for a company or to pay someone to do the Rocky Stallone thing . . . collections!
Right now, I’m using http://www.FastDue.com. What I like is it can be accessed from a BB (Blackberry) or an iPhone. It helps me keep my records straight & organized, especially when people write notes back & forth in the invoice. I do recommend this online program & the best part is it’s FREE!!
Yes, they a pro version for $9.95 a month, but for those starting out or just looking to make sure the client is billed on time, with the correct amount with a good description of the service, this is perfect.
You can’t have your clients pay up front? That’s the only real answer to collections. Don’t finance your customers.
We’ve also found that customers complain much less when they pay up front.
Fastdue looks cool, a bit like FreshBooks. Thanks for pointing that out.
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