It’s an all too common issue for business owners – customers order a shipment but fall behind on submitting payment. Backed-up invoices can have a negative impact on your ability to work on the business and focus on growth.  Also, too many accounts receivables may hurt your business’s ability to pay suppliers, day-to-day operating expenses, and even payroll. This becomes a vicious cycle that can have a negative impact on business credit scores/indexes and, in some cases, a business owners personal credit.  Once this happens when you try to get financing, new partnerships, better creditor/vendor terms, or leases you may be denied or paying much higher prices due to your new risky credit status.

To avoid past due accounts from hurting your business credit and finances, take the following precautions.

1. Make sure your contracts are clear.

   This includes clearly stating the terms and conditions the customer was offered and agreed to. In addition, the invoice total that they are agreeing to pay should be clear. If you offer a discount for paying early or issue late fees, this should be clear on the contract as well.

2. Send detailed invoices & follow up on them.

   Customers have the responsibility of paying their statements and you have the responsibility of properly managing the billing. Invoices should be itemized and have detailed information on the purchase(s). An invoice should be sent along with the product/service and followed up with by phone to make sure it was received.

3. Be selective before offering payment terms.

   It may sound counterproductive to be selective of who purchases your products, but when a company offers payment terms they issuing trust in another company and need to be sure that invoices will be fulfilled. Business owners can be protective of their assets by checking commercial credit scores before offering term conditions.  By reviewing credit, you will gain a better understanding of who you are working with and their past payment patterns. If a potential customer’s credit shows a pattern of late or unpaid accounts, you may conclude that they are too high of a risk and request that they pay upon receipt.

4. Keep your commercial credit at its best.

   Even if your client has great credit and is not facing financial distress that you know of, the net-30 or net-60 term they need can still cause you cash flow issues. Not only does it matter how good your customer’s credit is, your business credit should be in great shape as well. Especially if you plan to rely on a line of credit, overdraft account, or invoice factoring to cover expenses while waiting on receivables. To qualify for these common types of financing and get the lowest interest rates, you must be able to show responsible payment patterns.

5. Apply for a line of credit or overdraft account.

   If you have a line of credit or a high enough overdraft account this could help your business when money isn’t flowing properly, or clients are not paying on time.  With a line of credit available you can use it to stop credit issues from occurring when money is tight.  Remember you need excellent (or at least good) business and possibly personal credit.  Make sure to review your business and personal credit before applying for a line of credit with your business banker or a credit specialist.

North Shore Advisory has a team of business credit experts who would be happy to offer a free credit review and provide insight into your business credit reports.