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How To Handle Collections on Outstanding Invoices

One of the realities of extending credit to your customers is that some of them will be late with paying or not pay at all. While you can't always prevent this from happening, you can take steps to decrease the possibility. You also need to know how to proceed when customers aren't paying invoices as agreed. The following tips can help you increase your accounts receivable turnover and prevent defaults.

Get it in Writing First

Before you extend credit to a customer for the first time, it is important to establish expectations for both of you. If you are a sole proprietor or independent contractor, you can draw up your own contract before providing any services. This is no guarantee that the customer will honor it, but it does offer legal protection when you get your agreement in writing.

Set the Precedent the First Time Your Customer is Late

Unfortunately, some customers will take advantage of you if you allow them to. If you continuously allow late invoices to slide without taking action, you can expect the problem to only get worse. By being proactive, you have a better chance of collecting your unpaid receivables before your company experiences a serious cash flow problem. You can start out with a friendly reminder and work your way up to more aggressive collection techniques.

It is easy to detect a predictable payment pattern after just a few sales to a customer. Someone in your accounts receivable department should carefully monitor all accounts and take immediate action when payment is not received as expected. This can be in the form of a phone call, letter, personal visit or all three.

Find Out the Reason Behind the Failure to Pay

Late payment of invoices is not always the result of a business owner who just doesn't want to pay his or her bills. It could just as easily be due to a problem on your end. For example, your customer may have never received goods that were promised to him or her a month ago. In that case, it is correct for the business owner to withhold payment until the matter is resolved.

The larger your customer, the more complications you can expect when it comes time to pay the bill. Many accounts payable departments have very specific instructions as to what is required in order for you to receive timely payment. If the customer requests a purchase order number or an identification number just for them, you should provide it. This will help avoid delays when the invoice is due.

Cut Your Losses if Necessary

If you are certain that your company plays no role in the late or non-existent payment, you should evaluate whether it is worth your time and effort to retain this customer. To make this determination, consider how much time and money you spend collecting unpaid receivables against the profit you actually earn from selling to this customer.

Consider Outsourcing Your Collection Activities

Once accounts become 90 days past due, it is seldom worth your time to keep up with collection activities on your own. A professional collection agency has the resources available to get problem customers to pay. When all else fails, you may have to take your customer to court or enforce other legal remedies to force collection.

1st Commercial Credit proivdes accounts receivable financing and managment services for businesses, please contact us if you would like to finance your receivables or increase your cash flow due to slow paying customers.