Debt collection and billing are two things that startups don’t want to deal with. However, you started a business because you want to make money. If your customers are not paying on time, then you have a serious problem. If they’re not paying at all, the problem even gets worse.
For long-term success, startups must have an efficient debt collection and billing process. Proper management of accounts receivable should be a priority to ensure good cash flow. Debts have to be handled intelligently. What follows are some tips that entrepreneurs need to know about collecting debts and billing their clients.
#1 Speed Up the Invoicing Process
Startups should expedite their billing process. Instead of using snail mail, consider using email. Customers will receive their invoices instantly, instead of waiting for a physical delivery. By speeding up the process, you improve the company’s receipt of payments and prevent issues that include late mail delivery due to Sundays and holidays.
If you opt for an email delivery system, make sure that you have your clients’ up-to-date email addresses. Otherwise, your customers might not receive their invoices.
Apart from email, other ways of speeding up the invoicing process include using in-app notifications and text messages. These are also instant and can speed up the payment process. If you’re using in-app notifications, remember to add PAY NOW buttons so that people can easily make card payments.
#2 Use a Credit Application
Startups want to have new customers. However, most of them fail to vet potential customers’ reputation and credit-worthiness. As much as having a new customer is good for the business, chasing after bad accounts will waste your company’s energy and time. These assets are one thing startups can’t afford to lose.
If the startup extends credit to clients, it must also make sure that each account completes an application that contains data such as years in business, bank information, and credit references.
Depending on the amount of credit extended, it may be worthwhile to consider having a third party service that vets the credibility of the potential customers. This shields the startup from struggling with too many bad debts.
#3 Do Credit Checks
Before you do anything, though, you should first conduct a credit investigation. You are going to use your company’s money to provide financing for a sale or service, which gives you the right to decline credit that you find unacceptable.
Make sure your credit checks are more thorough where you’re extending huge debts. Or when it’s a small debt that needs to be given to a huge number of people. Manage the debts carefully and never hesitate to say no to those who don’t meet your standards.
#4 Set Clear Terms of Payments
Startups should have clear terms of payment for all customers. Clients need to agree to the terms before a sale or service is rendered. That way they know exactly the deadline for payment. Make sure the client understands the terms of payment and signs a contract to abide by the expressed terms.
Give clients a conservative billing period; make sure to avoid long billing terms that will make it more difficult for you to track when the bills are due. You should also consider requiring down payments on services to help offset the expenses incurred during the billing period.
Depending on your industry, you can consider taking upfront payments for your services to avoid debt altogether. For example, Airbnb takes payments from short-term customers before they get access to their services. Upfront payments bring the chances of getting bad debts down to zero.
#5 Modify Billing Cycle
You should send out invoices as soon as you complete the project, instead of waiting for the end of the month to issue them. That way you can collect what you are owed faster and improve your cash flow. It is also easier to collect when the client remembers the sale or services rendered to them.
#6 Provide Various Payment Options
It is easier for clients to pay your company if you provide them with different options for paying the bill. These include cash, check, credit card, and online fund transfer. Taking this step can help reduce the time it takes between the completion of the sales and the payment transaction.
Accepting credit card payments will give your customer the ability to pay their bill immediately. Keep in mind, however, that part of the transaction goes to the credit card company if you use this option. You should first decide if your startup can handle the additional expense before using this payment method.
You can also provide loans to clients through a third-party creditor. By doing so, the installment loan provider will be the one to determine if the potential client is qualified for the loan or not.
Note that when it comes to giving multiple options, you shouldn’t give too many options. Look into the options available and choose two to four options that are most convenient for you.
#7 Develop a Good Business Relationship with Clients
Satisfied clients can develop into repeat and long-term customers. They can help your company grow while also improving your cash flow. You should prioritize the customer experiences that will convert clients into brand advocates. It is important to deliver your obligations to them in a timely and effective manner.
#8 Send Out Reminders for Late Payments
Late payments cripple businesses. Technology improved enormously in recent years, and accounting systems can now automatically send out reminders to customers who fail to pay their bills on time. If a customer doesn’t respond to the automated message, send a 10-day demand letter through a registered mail.
The formality of the demand letter will show to the client that you are serious about the unpaid bill. Customers also need to sign for the letter when they receive it, which gives you the proof you need if they dispute the charges. Make sure that you state your course of action in the letter in case the client fails to pay after receiving it.
#9 Outsource Payment Management
If you are the only person running your accounting department, then it is best to consider hiring an accounting company to manage your accounts receivable. That way, you can focus on sales, marketing, and customer service. An accountant will handle receivables in a professional manner.
#10 Employ a Debt Collection Agency
Some startups hire a collection agency to go after clients with overdue accounts. However, you should do this only as a last resort.
Employing the services of a debt collection agency is expensive, especially if the dispute ends in litigation. You will lose a client as well. Before you hire an agency make one last payment appeal. However, a collection agency does allow you to be free from the stress of pursuing payment from the client, saving you time and allowing you to focus on the core operations of the business.
Startups require a positive cash flow to ensure a steady rate of growth. By improving your debt collection and billing processes, you are maximizing your cash flow, one of the most important aspects of a startup.
Conclusion
To sum it up, you can manage billing and debt collection in multiple ways. Speed up the invoicing process so that your payments get in real quick. Use a credit application and ensure you do credit checks to protect your business.
Be very clear on your terms of payment. Ensure you have an optimal billing cycle. Give people multiple payment options. Always maintain a great relationship with your clients. Send out late payment reminders. As you grow, outsource payment management and employ a collection agency.
These tips will help you have the optimum cash flow to grow your startup and take it to the next level.
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