Whether you’re a single proprietor or part of a Fortune 500 company, the one priority all businesses share is the desire to receive customer payments as quickly as possible.
Over the years, I’ve had the opportunity to discuss a number of issues with suppliers of all shapes and sizes and their number one priority, without exception, was getting paid faster. Needless to say, this led to some very obvious and familiar practices, and a few that were effective, but a bit unorthodox. Of the practices I’ve encountered when it comes to your business getting paid on time, here are 7 actions your company can take now to get paid faster.
1. Incorporate electronic invoicing.
If you speak to a number of suppliers about electronic invoicing, you’ll likely come across several that question its value. But it’s been proven that electronic invoicing shortens the entire payment process by a matter of days, which makes this option worth considering. By leveraging electronic invoicing, you’re removing a lot of the manual handling – which is where most of the errors occur. If there’s a mistake as a result of manual handling, you’ll likely tack on a few more days to the process. Handling invoices electronically allows businesses to realistically reduce payment time by 1-7 days. Furthermore, many third-party electronic invoicing solutions will allow suppliers to submit invoices to customers at no cost.
2. Use Automated Clearing House (ACH) to get paid.
In addition to actions that save valuable time on the front end, ACH saves time on the back end. Many companies prefer to be paid by paper check, often citing the ability to keep better records and the reduction of fraud. While paper checks may provide some with a better sense of security (some people simply like to feel the paper check in their hands), nothing is faster than getting paid electronically. In addition, the inclusion of remittance details has significantly improved with ACH.
If your company currently receives paper checks, ask your customer about ACH and what steps are necessary to get paid electronically.
3. Taking early payment in exchange for a small discount.
These days more early payment options are being introduced, whether offered directly by the customer or via a third-party solution. If you simply want your money as quickly as possible, there are few ways that are faster. But suppliers should beware, as there are pros and cons to taking early payment this way. It’s important to understand your organization’s cash position and whether the discount percentage is competitive with other financing sources available to your organization. It’s also worth understanding which is better for your company; being paid early by your customer or being paid early by a third-party solution.
Although there are likely fewer hoops to jump through in order to be paid early by your customer, there is the notion that your customer will know you want to get paid early and may have additional leverage when negotiating price. On the other hand, if using a third-party option for early payment, your customer does not have to know, but there will likely be more requirements to wade through.
If you decide to take early payment, regardless of who offers it, it’s usually more beneficial for terms that are longer than 30 days.
4. Accepting P-Cards, Credit Cards or PayPal.
Depending on the type of product or service you offer your customers, they may be open to paying you with a Credit Card, P-card or via PayPal. But as with everything else in life, there are pros and cons to this. Some of the pros include (obviously) getting paid early as well as being able to readily gain some form of remittance data with the payment. Different card processors offer slightly differing remittance details, so it’s important to know what you’ll get upfront.
Some cons include higher fees associated with taking a Credit Card or PayPal payment. Fees vary by credit card provider, but Paypal charges 2.9% of the invoice and may limit single invoices/transactions to $10,000 – depending on the service you have.
Again, if your main objective is getting paid as quickly as possible, the small fees and transaction limits may not matter as much.
5. Line of credit.
Another way to ensure you’ve got cash in the bank is to leverage your company’s line of credit. This is similar to accepting an early payment discount or card payment, but you’ll often enjoy a much smaller interest rate. If the APR of your line of credit is very competitive and there are little to no closing costs to set one up (unlike a business loan), then you’ll likely come out ahead by borrowing against it for a month or two until you receive the payment from your customer and repay the balance. This may also be a better alternative to factoring, as factoring will depend on your company’s credit rating and your customer’s ability to pay, as well as the length of time the payment is outstanding.
There is some risk involved in using a line of credit, however, as your company would be on the hook for the full amount if your customer did not pay the invoice.
6. Get paid in advance.
This may be a completely foreign concept for your organization, but it’s worth considering. Depending on the product or the service, many customers pay suppliers in advance, or at least pay a deposit before the service is performed or the product is delivered. It’s very common for potential customers to decline paying in advance, but if you ask 10 customers to do so, one might actually say yes – and that’s one more than you had paying in advance before you asked. You don’t get what you don’t ask for.
In addition, it will be important to properly apply the payment on your company’s balance sheet, as advanced payments are usually reported as a current liability (check with your accountant to be absolutely sure).
7. Do credit checks.
Just because a company is large, makes millions or billions in revenue and places large orders does not mean they have great credit. In fact, you would be surprised at how many large companies have questionable credit. Doing a credit check on potential customers can help you determine who is likely to pay on time and who may take much, much longer. Although it isn’t an exact science, credit worthy customers tend to be more reliable and don’t let their payables lag significantly beyond the due date.
Whether you decide to implement one, two or all seven of these options, it’s worth being creative when investigating ways to get paid faster. After all, money is the lifeline of your business, and having faster access to cash when an invoice is outstanding allows business owners to focus on growing the business and keeping existing customers happy. Many of these options also leverage technology to streamline the payment process and reduce time and resources spent on accounts receivable.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.