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Early Growth
December 16, 2014







This guest post was contributed by Chinwe Onyeagoro, CEO and Co-Founder of FundWell.

If you have ever found yourself waiting to collect from customers who consistently do not pay you when their invoices are due, then it may be time to try something new. Waiting for these delinquent customers to spontaneously develop better habits and pay you on time is not realistic. You should definitely reevaluate whether it makes sense to continue doing business with customers who are 90 days or more past due. Don’t be afraid to turn down a client. I know as an entrepreneur, new and repeat sales are hard to come by, so the thought of voluntarily dropping a customer may seem like a luxury that you cannot afford.

For example, if you find yourself waiting three months to receive payment on a $5,000 invoice, that capital is not available to put back into your business. If you sell goods and/or services for a profit, the opportunity cost of not having the cash from that customer's payment is likely much larger than the amount you are owed. If for every $1 of inventory that you buy, you can sell the finished product/service to a customer for $2 within 30 days, then an outstanding invoice for $5,000 could translate into $30,000 in delayed or lost sales income ($10,000 per month) over that 90 day period. Are any of your late-paying customers worth losing that kind of income?

If the answer is no, then it is time for you to review your customer payment history and clean house. If the answer is yes, then it may be time for you to offer those delinquent customers incentives to pay you faster. Since you can’t let them go, but doing nothing is too costly, give them a compelling reason to pay you on time. The most common incentive entrepreneurs offer their customers for good payment behavior is a discount.

There are a couple of things to remember in establishing a “Discounts-for-Faster-Payment” policy. First, make sure you assess what impact the discount you charge will have on your profitability. The goal should be for you to still make a profit on the sale. Don’t only consider your direct costs when evaluating how much of a discount to offer. Make sure you also include all relevant indirect costs in your calculation as well: including a percentage of your commercial rent/mortgage expense, IT expenses, management salaries, and other administrative expenses. You can work with your accountant or financial adviser to determine what kind of discount you can comfortably afford to give. Clearly, your discount needs to be meaningful, but if it is too high, it will compromise your ability to run a profitable business and grow profits over time.

Second, it is important to note that these discounts do not have to be offered forever. Use the incentives as a way to improve customer payment practices, revising your payment policies over time. Lastly, you may need to manage your incentives on a case-by-case basis. For example, you could establish the discount for existing large customers or for special cases, but you may not need to offer this discount for new customers. The good news is that as you grow, you will likely have better relationships with and more leverage over your customers, which should reduce the need to offer special payment incentives. At that point, like many well established companies, you may even be able to charge late fees to those customers who pay late.

Chinwe Onyeagoro is Co-Founder and CEO of FundWell. Prior to FundWell, Chinwe co-founded boutique consulting firm O-H Community Partners (OHcp). FundWell helps small businesses access financing by making lender referrals, assisting with loan applications, and providing advice on how to improve financial health. Email info@thefundwell.com to learn more.

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This guest post was contributed by Chinwe Onyeagoro, CEO and Co-Founder of FundWell.

If you have ever found yourself waiting to collect from customers who consistently do not pay you when their invoices are due, then it may be time to try something new. Waiting for these delinquent customers to spontaneously develop better habits and pay you on time is not realistic. You should definitely reevaluate whether it makes sense to continue doing business with customers who are 90 days or more past due. Don’t be afraid to turn down a client. I know as an entrepreneur, new and repeat sales are hard to come by, so the thought of voluntarily dropping a customer may seem like a luxury that you cannot afford.

For example, if you find yourself waiting three months to receive payment on a $5,000 invoice, that capital is not available to put back into your business. If you sell goods and/or services for a profit, the opportunity cost of not having the cash from that customer’s payment is likely much larger than the amount you are owed. If for every $1 of inventory that you buy, you can sell the finished product/service to a customer for $2 within 30 days, then an outstanding invoice for $5,000 could translate into $30,000 in delayed or lost sales income ($10,000 per month) over that 90 day period. Are any of your late-paying customers worth losing that kind of income?

If the answer is no, then it is time for you to review your customer payment history and clean house. If the answer is yes, then it may be time for you to offer those delinquent customers incentives to pay you faster. Since you can’t let them go, but doing nothing is too costly, give them a compelling reason to pay you on time. The most common incentive entrepreneurs offer their customers for good payment behavior is a discount.

There are a couple of things to remember in establishing a “Discounts-for-Faster-Payment” policy. First, make sure you assess what impact the discount you charge will have on your profitability. The goal should be for you to still make a profit on the sale. Don’t only consider your direct costs when evaluating how much of a discount to offer. Make sure you also include all relevant indirect costs in your calculation as well: including a percentage of your commercial rent/mortgage expense, IT expenses, management salaries, and other administrative expenses. You can work with your accountant or financial adviser to determine what kind of discount you can comfortably afford to give. Clearly, your discount needs to be meaningful, but if it is too high, it will compromise your ability to run a profitable business and grow profits over time.

Second, it is important to note that these discounts do not have to be offered forever. Use the incentives as a way to improve customer payment practices, revising your payment policies over time. Lastly, you may need to manage your incentives on a case-by-case basis. For example, you could establish the discount for existing large customers or for special cases, but you may not need to offer this discount for new customers. The good news is that as you grow, you will likely have better relationships with and more leverage over your customers, which should reduce the need to offer special payment incentives. At that point, like many well established companies, you may even be able to charge late fees to those customers who pay late.

Chinwe Onyeagoro is Co-Founder and CEO of FundWell. Prior to FundWell, Chinwe co-founded boutique consulting firm O-H Community Partners (OHcp). FundWell helps small businesses access financing by making lender referrals, assisting with loan applications, and providing advice on how to improve financial health. Email info@thefundwell.com to learn more.

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Early Growth
December 16, 2014