During slow economic periods, bankers often hear from business-borrowing customers that it’s hard for them to pay their  loans when their customers aren’t paying them on time.

So how can businesses reduce receiving late payments? There is no sure answer to this question, especially in difficult times. However, there are some practical ways to collect without hurting the business or customer relationships.

Credit approval process

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Not all businesses can afford to have a full-fledged credit department, but having someone responsible to require and evaluate credit applications is important.

The application should include past credit references such as banks or business references to verify credit and payment history. Global commercial databases such as Dun & Bradstreet also offer background information reports that state how long the company has been in business, ownership background and civil judgment, tax lien and credit rating information. In addition, credit-reporting agencies such as Experian and Equifax have the ability to generate business and personal credit reports for a small fee.

Creating payment incentives

Business owners can wisely extend credit to customers who consistently pay early or on time. There is an age-old method of “2/10 net 30,” meaning if the account pays within 10 days, you will discount the invoice by two percent to promote good behavior. If the customer doesn’t take the discount within that time, then the full balance is due in 30 days. 

For businesses not taking the 2 percent discount, each month is the same as paying 24 percent extra per year. This is expensive financing. Of course, this practice benefits the seller as cash flow is improved, saving owners time and effort that can be spent towards building a successful enterprise rather than in collections.

Check accounts receivable

Before approving credit check the current accounts receivable ledger to see if an account is paid current - or almost current - before delivering the next order. It is amazing to see companies sell additional services and merchandise on credit to accounts that are already delinquent. If the customers can’t pay the oldest invoice, how are they going to pay the invoice just created?

Consider converting unpaid accounts to either cash on delivery (COD) or charge on a credit card. Business credit cards are commonplace nowadays, and this is a good way to receive payments. There is a cost to the credit grantor in the form of merchant discount fees; but if the credit card company gives an authorization, the seller is almost assured to receive the funds in two to three days.

Clarify payment policies

Once credit is approved not to exceed a certain amount, it’s important for all creditors to know the payment policy without confusion. Some industries are comfortable asking for partial payment or a deposit before work starts. This is a great way to collect at the beginning of the relationship, allowing the seller to have operational funds to pay expenses such as wages until the balance is collected.

Customers may still not pay on time even if businesses follow all the precautionary steps. In this situation, the business should place a phone call or write a friendly letter to the account holder. The delayed payment could be an honest mistake, but customers may also believe the business doesn’t care if payments are on time if they don’t receive any correspondence or a telephone call. Remember the old adage “the squeaky wheel gets the grease.”

Collections agencies

Even the smallest of companies can benefit from a collections agency. The cost of using a third-party vendor can far outweigh the amount of unpaid debt and time spent rounding up customers. Knowing a business uses an agency can be enough of an incentive to keep a customer paying on time.

Some of the larger credit agencies have created automated online services to help collect even low-balance debts they normally wouldn’t go after. These have customizable letters to reflect the tone you want to take and address verification databases to make sure a customer hasn’t moved.

One day the recession will end. Following some of these tried-and-true collection practices will help Southern Arizona businesses to run smoothly during good and not-so-good times.

Contact Fred Dawson Jr., executive vice president and chief credit officer for Commerce Bank of Arizona, at fdawson@commercebankaz.com or (520) 325-5200. Commerce Bank is a locally-owned community bank specializing in serving small- to mid-size businesses in the Tucson region.