When owning a business one of the important parts is ensuring you have cash flow. No cash flow equals a dead business. Collections are a critical aspect of your cash flow. You have to make sure customer invoices are paid in a timely fashion. The question with a late paying customer, when should you cut them off? I don’t have to tell anyone times are tough. The economy is still in the dumps, and more than likely will be for quite a long time in the future. I have compassion for my customers that are struggling, but up to a point.
Customers have told us all sorts of stories why their bill is late. Believe me, we’ve heard all of them. It’s part of human nature when people get desperate, they will perform desperate measures. Things they would never consider possible, they will do. This includes, lying, stealing and going against their honor. Meaning they will do anything to ensure their own survival. It’s part of your self-preservation instinct. I don’t blame them for it, I just ensure my business and policies have protections to minimize this problem.
I believe in establishing long-term relationships with my employees, consultants, vendors and customers. It makes for good business, and can in fact be a great way to differentiate your business. It gets somewhat troubling when a late customer does not call us back after many Emails, voice mails and faxes. We’ve have an internal policy if a customer does not bother responding to our payments requests, then will keep to our strict 20/40 day policy. After 40 days of no payment you get cut off no exceptions. It shows we mean business and are serious about our terms. This usually sets the late paying customers down the straight path.
If they do respond to our notice, and give us some valid reasons (i.e. the dog did not eat the check), their previous payment history, we may not charge a late fee. Same goes with a partial payment. A payment of any kind shows the customer has committed to keep the relationship working. Another key is making payments easy to make. Accept payments online, and allow for all sorts payment methods such as checks, cash, credit cards and even PayPal. If they can’t pay by check, they might have a credit card with credit to make payment.
Though there is a limit of how late your customer can be before affecting your cash flow. After all, you should care about your own self-preservation. Just like every other business, we have bills, salaries, vendors, and debts to pay back. How much leeway will my vendors give me if I can’t pay them? At what point do you prevent their business demise from affecting your business. It could become a vicious cycle that eventually someone has to pay to ensure commerce will still occur.
We recently had to deal with one customer whose account was over 90 days past due. They have been a customer of ours for over 5 years. We are completely understanding that times are tough, and know their business is not doing so well. We had to suspend them after the date we were to receive a check payment from them. After this suspension, we not only got one month’s payment but we got another. This keeps our business commerce flowing.
Readers: If you own a business/rental property how do you deal with late customers? At what point do you cut your losses? What techniques do you use to collect from late customers? For others, what’s the biggest lie you have told to delay payment?
IJ, good rule you have on 20/40.
I have several rental income producing properties. One I made a compromise after he began paying late or partially, which was to just pay twice a week, half each time to help cope with the payments.
My other property I have a 3 day rule, and then there's a penalty. Luckily, I have never enforced that rule in my 8 years of ownership.
Finally, the last property is a vacation property which is paid upfront, or else no usage is permitted.
I guess I'm pretty strict, and only want high quality customers. But, don't we all?
When I'm late…. well, I'm never late. I'm a good customer b/c I'm generally on time or early!
Best, Sam
Hey Sam,
I donno how the landlord rules are in CA, but it can take 6 months to evict a bad tenant. So when I pick my tenant I choose wisely.
A way to find quality tenants is have an open house. It works great you get 30-40 perspective tenants and you don't have to show the place one by one.
Looking back, I think I've avoided bad debt mainly by choosing the right clients — I've only ever had one invoice go unpaid despite serving several dozen clients over 10 years as a freelance, and it was for a small sum. (I won't say trivial because it still annoys me to this day that I worked and I didn't get paid!)
I get lots of late payers though. I have a couple of clients where I'm lucky if I get an invoice paid in 3 months. Normally they get bunched together and paid, along with a big apology.
They're good clients otherwise though, I like the work I do with them, and crucially I know they're good for the money. The first late payment from a client is the hardest, because you don't know if it's an indication of incompetence or something more serious. After a decade, I'm sure these two are just very poor at paying their bills on time, rather than living hand to mouth.
Funny to find this post today. I was just talking to my property manager today about tightening up the time table for late notices and evictions of non-paying tenants. They will allow late tenants to pay by check. Before the property manager will refuse to accept a check from a tenant the tenant has to bounce a check first. So the situation that we are dealing with is a tenant who failed to pay March at the first of the month. On the 15th of the month he paid by check. The check bounced. Court papers were filed. It takes 2-3 weeks to take a tenant to court in Albuquerque. He has a court date for April 12th. He will have to be out of the unit by the following Monday. I am trying to shorten the eviction interval to 30 days. You are absolutely right, when people are in trouble, the survival instinct kicks in and they don't make good choices. Whether or not a tenant pays, I still have to maintain my units and take care of repair requests. What I am trying to work toward is eviction i 30 days, turn over in 7 days so that the unit is back on the market 45 days after the first missed rent payment. I understand times are hard and I have empathy but we are finding that up to a point the more that we work with tenants, the less likely they are to take the prospect of eviction seriously and the less likely they are to prioritize their rent payment.