Negotiating Payment Terms With Cash-Strapped Clients

by Thom Tracy

2 min read

An unfortunate aspect to any business is dealing with customers who are unable to pay. It can be difficult balancing feelings of compassion toward those who are financially struggling with business acumen in doing everything in the best interest of your company. If the customer is willing to discuss options, there are a few different paths you may take, all of which provide some sort of benefit for your company.

Financing Plans

Outlining a financing plan allows a customer to pay off small increments of what is owed. A financing plan voids the previous payment terms, such as standard terms like net 30, and assigns new due dates for smaller dollar amounts. Be mindful that financing plans place additional burden on the customer. In addition to paying the entirety of the outstanding debt, a customer must also pay interest.

Partial Payments

While the receipt of a partial payment is unfavorable, it builds strong rapport with customers unable to pay. Being willing to accept a portion of what a customer owes results in a write-off for your company. However, an intangible asset of goodwill is created, as this option maintains the business relationship for potential future business opportunities.

Service/Asset Exchange

If a customer is unable to pay an invoice with cash, inquire about alternative payment methods. The customer may be attempting to sell an asset desirable to your company. Alternatively, service companies that are unable to pay may compensate via services. For instance, if you perform bookkeeping for a marketing company, see if payment can be collected through the receipt of marketing services.

Analyze Cash Flow

Negotiations regarding how to address late payments should involve discussions on anticipated cash flow by analyzing a statement of cash flows. Does the customer experience seasonal business operations expected to soon increase? Are there prospective one-time revenue sources anticipated? Are future recurring expenses such as a mortgage or vehicle payment soon to be paid off? While a customer may be currently unable to pay an invoice, the situation may be entirely different in the near future.

Future Business Activity

If a customer who previously had difficulties paying on time inquires about future work, there are steps you can take to protect your business. Establish a payment schedule that incorporates multiple due dates to ease the cash flow impact of a large invoice. For larger jobs, review the client’s financial statements, primarily its balance sheet and statement of cash flow. Request collateral be held while services are performed that is retained upon a failure to pay.

Require a deposit of a fixed percentage to be paid upfront. Based on the perceived risk of default, increase the rate. Implement progress payments that require incremental payments based on measurable benchmarks. To ensure payment is received, require the service to be prepaid or for payment to be fully due upon the completion of a deliverable. Finally, it is always an option to decline to extend credit to any customer who is unable to pay.

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