Small business owners often report that the biggest challenge they face as they build a stable client base and reach profitability is cash flow management. This is especially true for those whose accounts run on an invoicing system, and a little less of an issue when looking at cash-and-carry only companies. That’s often because invoices can sit unpaid while expenses at your business continue as normal. An unpaid invoice is only income on paper, so bringing that money into your bank account has to be a top priority if you’re going to meet your outgoing obligations.
The first step is to shorten the average time between billing and receiving payment. If you have clients you’ve agreed to work with on a plus 30 or plus 60 basis, it’s time to negotiate to see if they can afford to shorten that time for you. If you simply put a due date a few weeks in the future on your invoices, a change of policy announcement and a shortening of the grace period is all you need. It’s a good idea to give your clients time to adjust to the change, and also to send out gentle reminders about halfway between the invoice date and the due date.
Follow Up On Unpaid Accounts
When accounts exceed their grace period and become late, it’s time to follow up and make sure the money comes in. Be polite, but send individualized messages reminding the client about the invoice. If the client is repeatedly behind on payments, you might also want to consider other methods of accessing funds or mitigating the risk of nonpayment.
Consider Financing Invoices
Small business owners can get an advance against unpaid invoices from financing companies who specialize in asset-based lending of various kinds. Invoice financing provides a cost-effective way to access a large portion of the invoice’s value for a reasonable fee. You will need to communicate to clients if the invoice is being financed, because the financing company will collect payment and send you the remainder after fees and the cost of the advance. This does not take the invoice off your books, though, it just gives you a cash advance against payment.
Factoring for Unpaid Invoice Debt
The last resort when you think the payment might not come or you’re not sure how long you will have to wait is factoring or selling the invoice outright to a financing company. This takes it off your books, but it can strain relationships with clients, so small business owners need to be careful about how and when to use factoring. It also typically brings in less money than financing the invoice, because the factor assumes more risk by buying the debt outright. It is a way to recoup part of the value of an invoice that might otherwise go unpaid, though.