As a business owner, billing on credit terms means you are now financing your customers as if you were a credit card company, an unsecured vendor of record. The moment you decide to offer credit terms to customers will be the day your business will become subject to high risk like participating a gambling table in Vegas (except with better odds). You have chosen to put the success or failure of your business hedging on a bet in getting paid on time, and any delinquent payments from customers may create your accounts payable past due to suppliers, fixed expenses, payroll and taxes. All your reserves of cash can go down the drain very fast, and all it takes is one customer not paying on time, or not paying at all
How Do I Prevent Delinquent Payments From Customers?
There is never a guarantee in getting paid, but you can install some preventive measures:
Always check credit through a reliable database like Dune and Bradstreet. If your customer is not listed in a Business Credit Database, then ask for a Company Credit Application and the main thing to see is at least three other vendors that have the high credit issued to your customer. If your customer for example, is asking for net 30 terms, and a high limit of $20,000.00. it is recommended that your customer have at least 3 other vendors that are CURRENT and ACTIVE for at least 6 months history (not last year references), and all 3 vendors must exceed 20,000 in balances each.
If your customer has a Master Service Agreement (MSA), make sure to read it carefully and make sure you understand the terms of doing business with your customer. The MSA usually explains the guidelines of how you will invoice, when you will invoice, what address is to be used for mailing your invoices, and what documents should be attached with your invoice in order to get paid on time, or even get paid at all.
If you customer uses purchase orders, make sure to abide by the language and terms of the purchase order. For example, expiration dates can cause a delay in getting paid if your order arrives after the expiration date, or even non-payment because there is probably going to be a return or renegotiated price due to the order arriving late.
Invoice Format is very important! It is very important to use a simple, standard invoice template and must always contain the following:
Header must have your business name as it appears in your Articles of Inc, Insurance Certificate, contracts, and MSA agreements you have with your customers. It is not recommended to use abbreviations on your invoice header because that is not your legal name, and this may cause a large customer to hold payment because your invoice does not match the vendor or record on file.
Credit Terms on the invoice, for example, Net 30 days, or Due upon receipt.
Date of invoice, make sure your invoice always has the date printed.
Itemized pricing if that is what your customer is expecting vs one lump sum at the bottom.
Reference numbers, PO numbers, UPS or Fed Ex tracking numbers printed on the invoice can save a lot of time for the payables department.
A business may consider using an invoice factoring service company to help out with establishing credit limits and financing the business growth for all credit sales. If a business is selling on credit terms and growing faster than retained earnings, it will eventually run out of money.
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