Essentials

To achieve rewards in business, you must weigh the risks you are willing to take. And during a recovering economy, there are risks you should avoid, such as allowing customers to consistently delay payment.

Slow-paying and nonpaying customers can jeopardize profits and a business' survival. Therefore, it is important to have effective receivables policies and make sure your customers are aware of and understand these policies.

Following are some hints Inc. magazine offers to improve your billing tactics and get paid on time.

Payment agreements

Thoroughly investigating new customers can help determine whether a customer has maintained a solid payment history and will pay on time. An easy way to investigate potential customers is by performing credit checks on new residential customers and studying financial statements of prospective commercial customers.

Also, be sure to explain what work is necessary on a customer's roof system and clearly state your payment terms. You should describe in detail what you will be doing to a customer's roof system so he understands how each cost is related to the work.

Once you and your customer agree to payment terms, draft a formal payment agreement documenting what work will be done and the costs involved. The agreement should specify when payment is due and whether a down payment was made. You also should include your company policies regarding late payments and collections.

Some companies have found that offering incentives in payment agreements can speed up customer payments. For instance, a 5 percent early-pay discount on a bill that is paid in full may motivate a slow-paying customer. And don't think of such discounts as losing money. For example, for a $10,000 project, a $500 discount may have been spent on more invoices, follow-up calls and other collection procedures.

Another method is offering to reduce or cancel late-payment fees if the customer's payment is received immediately after a reminder.

Staying connected

A customer sometimes withholds payment because he has questions or a problem with the quality of work. After work has begun, calling to gauge a customer's satisfaction may help avoid late payments. But if a customer still is late with his payment, have someone contact him immediately.

A convenient, effective way to quickly contact a slow-paying customer is e-mail. When recording customer contact information, ask for an e-mail address, as well. E-mail gives a slow-paying customer an easy way to respond if he has questions or concerns about the work. And it may save a slow-paying customer some embarrassment if he is experiencing financial difficulties and does not want to speak to your collection agent directly. If your customer does not have an e-mail address, contacting him by telephone is better than traditional letters, which are easier for a customer to ignore and can drag out the payment process even longer.

Last resorts

When a customer's payment is extremely past due and you unsuccessfully have tried several methods to make him pay, it may be time to take more formidable action.

A promissory note, a promise to pay by a certain date, is a method that will stand up in court. You can promise to stop all collection activities against a customer if he signs the note. If a slow-paying customer refuses to sign a promissory note, try more aggressive methods, such as stopping work or arbitration. (For more information about arbitration, see "To arbitrate or not to arbitrate," December 2001 issue, page 16.)

For example, the owner of a $12 million construction company found stopping work on any job in which payment was 20 days overdue was an effective method to get his customers to resume payments. Of course, he notified customers after payments were 15 days late and warned them of an impending halt to construction.

Although it is difficult to handle some customers, it is important to remember that you are providing a service and must remain professional during all customer encounters, including when collecting money.

By establishing and explaining receivables policies, you can ensure your customers understand their payment responsibilities and avoid having slow-paying or nonpaying customers.

Christina Koch is assistant editor of Professional Roofing magazine.