How Business Owners Should Clean Up Their Credit?

Cash flow for any business is crucial as it is the lifeblood of every entity. In this regard, every business should ensure that its customers make no delay in making the payments. Moreover, recovery of credit can be a time-consuming, frustrating, and at times, an unsuccessful process. Businesses should know how to clear credit in an efficient and timely manner. A proper credit management policy is the key to it.

Implementing a Credit Management Policy

Many factors need to be considered while setting up a credit management policy. One crucial element is profitability level per sale. Businesses with a low gross profit level, like livestock exporters, cannot withstand huge bad debts. Therefore, they need to maintain a vigorous credit control system. Businesses with high profitability levels like software businesses can afford a relaxed credit control policy.

Another factor is whether the business offers a monopoly service/product or a commodity type service/product. Monopoly dealers have better control over the terms and conditions of trade. It also depends upon what kind of working relationship you maintain with your clients. Having clear channels of open communication builds a positive relationship with your client. For instance, making courtesy calls in advance of a payment due date makes it look professional and allows your client to explain his situation.

Another factor could be the type of internal management team your business has. Have frequent meetings with different teams of your company. Make sure your staff is well trained to question, negotiate, or persuade.

How To Ask For Payment Professionally?

Initially, you tend to hold good faith that your payment is getting processed soon. But, as time-lapses and your payment is not received, you need a course of action to ask directly for payment. You may pen down a payment request mail without being rude.

What Is It To Be Rude?

After a deal is completed, payment is mostly a taboo topic for some people. Many businesses avoid open discussions of payment. It is mainly out of fear of sounding rude. They may feel embarrassed by asking about it. Unfortunately, they may become overly polite or vague in asking for their due balances. Even after balances become days and weeks overdue, they rarely ask for payment directly.

To avoid that hesitation, ask yourself a few questions first. It would prevent you from feeling uneasy in such situations.

• Have you executed the transaction as agreed with the customer?
• Was the customer aware he needs to pay you once the deal is executed?
• Are you asking for more than what you agreed upon?

If you have reasonable answers to all these questions, you have nothing to hesitate about and can ask for payment in a straightforward manner. You have completed the transaction on your part, and now your client should do his part.

How To Ask For Money From Clients?

You should know how to get credit back without throwing tantrums at clients but at the same time being polite, precise, and direct in a professional manner. Keeping all this in mind, you may wonder about how to ask for money from clients! The following key points may help you in this regard:

• Ensure that your client is fully satisfied with the work/transaction. They won’t have any valid reason to pay you.
• Ensure that your invoice is clear and correct before contacting your client.
• Determine the visibility of your banking details on invoices to motivate your clients for timely payment.
• Make sure your terms of trade are clear on the invoice and seen by the client.
• Create a simple invoice with a due date that can be easily understood.
• Ensure that the invoice reaches the right place.
• Prefer to send invoices through the mail so that they reach there on an intended day.
• Before your payment becomes due, go for a courtesy call and find out if your client liked your services.
• If there’s a query from the other end, make sure to resolve it, then only you will get paid on time.
• Always try to provide good quality products/services to your clients.
• Add a footnote emphasising timely payment to avoid any disruptions in future services.
• Start sending systematic reminders to clients for payment. 50% will pay approximately after some reminders. You can make phone calls to the rest to follow up further.

Tips On How To Remind Clients For Payment

1. Outlining expectations to your clients is always a good idea

Outline the terms of trading that you are expecting. These should be indicated at the beginning of the relationship. For this purpose, you can use customer engagement templates that include a paragraph relating to trade terms. It may contain:

• Invoice dates
• Credit collection procedure
• Any additional charge for overdue balances

2. Invoice customers in an efficient manner

You can receive prompt payments by encouraging clients in the following ways:

• Sending out invoices on completion of a job or regular dates.
• Mention all payment options in your contracts or invoices.
• Keeping in touch with your clients.
• Offering some discount for early payments.

3. Commissions as rewards

The sales team may even go out of the way and ‘bend the rules for booking another sale. The sales staff needs to be rewarded for this kind of motivation. Make it a point to reward your staff upon collecting payment instead of when a sale is made. This policy is a mode of encouragement to your staff and enhances your cash flow.

4. Training of staff

Your employees need to be aware of your terms of payment, invoicing, and debt recovery system. Make sure that each member goes through the procedural manual and the policies as a major part of their induction program.

To improve the possibility of prompt payments by customers, you can include these points in procedures and policies:

• Before you offer credit, make sure you go through a thorough business check.
• Setting up customer credit limits.
• Before dispatching goods, wait until the payment is received.

5. Ask for an advance deposit

If a client agrees to pay an advance amount, it reflects his seriousness about paying you in full after the project. Otherwise, he may frown upon this clause or completely refuse to accept it.

If you think such heavy advance deposits are likely to turn away your new clients, ask for smaller payments as soon as you reach some milestones.

Review Your Performance & Strategy

Once your credit management policy is designed, your staff is encouraged, and you know how to ask for payment from the debtors; you then need to review your performance and strategies designed. You need regular updates on all these aspects to know about their efficiency and effectiveness. You also need to check your operational processes to get to know about your lending capacity and cash flow currently floating in the business.

Revising the strategies or plan only every quarter is not enough. You need to stay operationally afloat and have to manage outstanding debts with a broader perspective. It is also recommended to have insights on debtor’s profile, agents, collection funnel, and collections performances.

Once you have the right details, you can make much more informed decisions, maintain healthy client relationships, and keep the right cash flow in the business. All this while knowing how to clear credit and keep the process smooth.

Also read:

1) How To Open A Bank Account?
2) What is Online Money Transfer? Changing Contemporary Financial Transaction.
3) What are Mutual Funds? Here's what you should know
4) Difference Between Payout Modes: Wallet vs UPI vs NEFT vs RTGS vs IMPS
5) OkCredit: Simple, Paperless & Secure solution for businesses

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FAQs

Q. How do small businesses collect outstanding credit?

Ans. To collect the outstanding payment, creditors use the medium of formal letters, followed by phone calls. If there is still no repayment, creditors go for the option of assistance from collection agencies or opt for legal action.

Q. How to collect debt effectively?

Ans. For timely and efficient debt collection, small businesses use CRM. This helps them in identifying potential bad debts and act accordingly by taking suitable action. It also helps in handling overdue payments and contacting clients. In the case of default, you can also employ lawyers or debt collectors.