Customers don’t always pay on time. Even if they are regular payers, they usually wait until the end of their net terms with you. Sometimes the customer can’t pay, meaning they literally don’t have the cash on hand. Sometimes the customer won’t pay any faster because they aren’t incentivized to, and a deal is a deal. The “won’t pay any faster” customers are usually large companies who set the payment terms at 60, 90, 120-days. What lever do you have to pull with a giant accounts payable department? None, really. In these cases, there’s really nothing a small business can do to speed things up. One of the problems we see is that a small business will think that they can be the one lucky exception. "They really love the product. Plus we are offering them a 10% discount, so I’m pretty sure they’re gonna pay us early. Just wait. "Now, don’t get me wrong, some of these strategies to speed-up payments can work with the right customer. But places like Procter & Gamble or Anheuser-Busch are dead-set on 90-day to 120-day terms. Rejecting special exceptions is much easier from a process point-of-view, and they certainly don’t mind having the extra cash on hand for a couple of extra months. This is often the cost of doing business with larger companies, they have leverage over payment terms. Which sets up three choices for small businesses when working with these types of larger customers.
- Fight it. We can be the exception. They’ll pay us faster, you’ll see.
- Wait it out. The contract says 60-120 days. Let’s wait a couple of weeks/months for our customer to pay. We can finance the deal to keep the client relationship genial.
- Speed up cash flow. A cash infusion via a bank loan, alternative loan, or invoice factoring. Keeps the business focused on growth while taking a percentage hit in the form of fees or interest.
What’s interesting, though, is a lot of business owners will view the first two as being the “free” options and the “speed up cash flow” as the only one that has any cost. But what’s the cost of being on hold for two, three, four months? That’s essentially hitting the pause button on your business for 25-33% of the year! It’s especially concerning that 82% of small businesses fail because of poor cash flow management. It’s the age-old question of saving time vs. saving money. The one important difference: we can’t make time back.