May 19, 2024

Small Business: Learn How to Collect From Slow Payers

Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.

So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?

Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.

DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.

Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.

“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”

Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.

“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun Bradstreet, that will assess the financial strength of a company.)

SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”

On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.

“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”

What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”

GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.

Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.

Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).

KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?

At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.

“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”

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