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6 Reasons Why Clients Pay Late

Finding out the real reason why a customer isn't paying their invoice or statement on time has become an art. Trying to sift through the endless amount of excuses they give on the phone or via email can be troublesome and hard to analyze. Without an exact reason, you may never be able to find the precise reason why your clients aren't paying you.

We've found that there are a 6 different categories that your delinquent clients fall under and in order to have a superb account receivable management you must be able to identify each category and figure out the precise reason for their tardiness.

1. FINANCIAL TROUBLE

A customer may be faced with financial trouble for any reason, they may be going through hard times and are unable to pay you. This is the worst possible category for an active customer because it has the highest risk for your A/R account. There is no doubt that bankruptcy rates are better than they were during the Recession but it's important to keep informed on these trends.

How do you manage this type of customer? In order to avoid this situation, it's important to monitor your customer portfolio on a standard basis to see if there are any changes in their credit profiles. Furthermore, you can also make an educated prediction by looking at your customers' court records to see if there have been any recent judgments, liens, suits, UCC filings, or bankruptcies. If you find out that one of your customers is in financial difficulty you can quickly and should take action. We recommend you adjust credit limits based on the information you have. If you sold something and are waiting to get paid, that should become a top priority.

2. CUSTOMERS WHO CAN'T TRACK PAYABLES

It's possible that your customer's internal accounting practices are a mess. If you've ever been a part of a disorganized accounting department you know it's almost impossible to track and processes. You will most likely encounter this scenario with new companies or startups who don't have a set system in place. 

These types of customers require more attention, you will need to follow-up regularly and remind them that they have an upcoming payment. Setup systematic reminders before and after the due date for these types of clients. If emailing, faxing, or sending letters don't get you paid, you will have to try more severe receivable management methods to capture the attention of this type of client.

3. WELL-INTENTIONED NONPAYERS

These types of customers have a reasonable explanation for their payment issues. In most cases, the reason why they cannot pay you is due to their cash flow. This is the type of client who can pay you on a specific day in a few months.

Since these customers are reasonable, they are willing to listen. Make the suggestion of paying in small increments, rather than one large sum. Make their payments percentage based, increasing between 5% - 10% as the months pass. If they agree to that, confirm it in writing and contact them 24 hours before they are scheduled to pay you. 

4. INDUSTRY PAYMENT PRACTICES

This type of customer varies by industry. Some of them may pay late because of their sales, receivables and inventory cycles are customary to the industry that they work within. Some industries such as construction, building suppliers, manufacturing, wholesale distribution are more of a headache than others.

The best way to handle these types of customers is to have a corporate credit policy. Make certain that you signal your customers that their average industry cycles are not allowed. Your customers will know that you have robust credit policies in place making it (hopefully) easier for them to understand. Follow-up regularly on late invoices, help them with their payments by giving them installment options. Just because the industry has a high delinquency rate doesn't mean your firm has to.

5. CUSTOMERS WITH PRIORITY ACCOUNTS

Payment priority lists do exist and your company may not fall on the top of that list for a specific customer that you serve. They may not view your product as a critical piece to their business cycle or it may be easily replaced by other suppliers. It might also be possible that your customer has suppliers who have stricter credit policies in place.

Having other suppliers to attend to does not give this type of customer a free ride. You need to have a firm stand and clearly define the process for your accounts. It's important to convey that getting paid is just as important to your customers as it is your organization. 

6. CUSTOMERS WHO DISSAPPEAR

These are the types of customers who do not answer your emails or calls and fall off the face of the Earth without a trace. Some of these types of customers may have never had any intention of paying you from the beginning or may have an unknown reason for not answering your calls.

Although these customers are a nightmare, you still need to deal with them all the same. The best way to deal with these types of customers is to either hire a professional collection agency, which may cost a lot of money, or cut your losses and write off the invoice before blacklisting that client.

CONCLUSION

There is a risk involved with sending invoices and statements to your customers. It should be a top priority for your organization to have a highly trained and qualified A/R management team so you can assure that your company gets paid.