5 Effective Practices to Reduce Payment Delays from Clients/ By Ashwani Rathore

Every year almost 80% of Small and Medium sized enterprises suffer from late payments by customers. This statistic is especially dangerous if applied to a country like India as most of the businesses in small markets are dependent on the credit structure. Sunk money in the market is the main reason many go out of business. The higher the balance of Accounts Receivables, greater is the risk of default on an average. Hence it is important for SMEs and Start Ups to reduce the lending duration and payment delays from clients.
Here are a list of effective practices that would help you a long way in the domain -

1) Notify About Your Payment Terms Beforehand
If there is a miscommunication between the parties regarding the terms of credit and payment, it is a disaster waiting to happen. You should provide a written conveyance to all your customers about the payment due dates and company policies in case of default, even before you lend them the credit. Written copies of agreements would push them to be professional and would also give you an upper hand in case the matter ever goes to court.

2) Remind Them about Payments with Automated Systems
Timely reminders about due payments are of utmost importance in order to settle with creditors. But at the same time, it should not be rude or cost you future business with the customer. Therefore automated systems are often used for the purpose. One of the most innovative tools for SMEs and Start Ups in India is an e-invoicing app. It helps to send automated reminders to customers about their upcoming scheduled payments via SMS or Emails with a single click. It also has tons of other handy features that make e-invoicing processes smooth and easier to maintain.

3) Keep a Track of the Leverage Your Customers Have On You
Never put all your eggs in the same basket. The same concept can be applied while lending stock on credit. To minimize the leverage your customers have on you, never lend a large chunk of your stock to the same customer, however good his credit score may be. Assuming the amount lent to be constant, the number of creditors should be as large as possible. This is because the average amount lent to the creditor is directly proportional to the probability of default by him. Hence, a big creditor wanting to pay late can have a significant effect on your cash flow or working capital.

4) Demand Part Payments from Clients
At the time the credit is issued, you can also choose to demand a part of the billed amount from the client. This can be carried out especially while dealing with customers who have had a bit tainted record in the past or first time buyers whom you have no market info about. The part payment usually hovers around 20% of the billed amount, but it can also go up to 50% depending upon the situation. Though creditors who pay on time are often exempted from this practice so as to develop healthy business relationships with.
5) Hire a Debt Collection Agency
This should be the ultimate resort in case of a default, when all other mentioned points fail to retrieve the due cash. There are a lot of collection agencies in the market, usually consisting of lawyers, which would contact the clients on your behalf with written notices, giving them final warnings to pay back the sum. If this fails, the agencies will help you with all the legal proceedings and handle the court cases for you, thus saving you a lot of time and effort along the way. This would make sure your business retrieves the sunk cash as soon as possible with the help of a legal framework.

Additional Tip - Use Trade Credit Insurance to minimize default risk. These insurances help protect your hard earned sales as well as Accounts Receivables.

(Ashwani Rathore is Co-Founder & CEO- SpiderG)