How To Avoid Customers That Don't Pay Their Invoices

The short answer: do your homework before you make the sale. Although the economy is improving, things are still difficult for many small and medium sized companies. For many owners, sales are still slow, so whenever they get a sales opportunity they jump on it. They extend payment terms, if the customer demands it, to help ensure they don't lose the sale. So just taking any sale for the sake of it is a risky strategy. In our view, a sale is not a sale until you get paid. And if you don't get paid, you end up being worse off.

So, how do you make sure that you only work with customers that pay their invoices? There are a couple things that you can do to improve your chances of getting paid on time:

• Check commercial credit reports: This is a very important and simple thing you can do to improve you chances of getting paid on time - or at all. Get a commercial credit report on your customer's business (through Dun & Bradstreet or Experian) and look at their buying and payment habits. The report will also flag other potential issues like liens and lawsuits. Remember that as opposed to consumer credit reports, anyone can buy a commercial credit report

• Get good contracts: Work with an attorney to craft a solid contract for your services. Be sure to use that contract in your sales

• Use an acceptance sheet: Work with an attorney to develop a product/service acceptance sheet. This sheet should outline the product/service, the acceptance criteria and be signed by an appropriate customer representative when the work is complete (or product delivered). In our view, this is one of the most important and overlooked documents. It can be used to defuse disputes and misunderstandings.

What if a customer pays - but pays slowly? Not everyone can afford to wait 30 to 60 days to get paid. Then, you should consider a business financing solution like factoring. Factoring accelerates your revenues from customers that are credit worthy but pay slowly. It enables you to offer payment terms while minimizing the cash flow problems created by slow paying customers.

One of the advantages of invoice factoring is that it's easier to obtain than a conventional business loan. The biggest requirement to qualify is to have customers with good commercial credit. It's OK if they pay slowly, provided that they pay. Another advantage of invoice factoring is that the factoring company can act as your credit department - you can use their resources to determine the credit worthiness of your customers.