6 Early Warning Signs of Customer Payment Problems -- & What to Do

In this current economic downturn, many companies are experiencing significant payment delays from their customers and clients, which then cause delays on their part paying their vendors, and the cycle continues. It’s important, especially now, to stay on top of your accounts receivable, and to stay in contact with your customers. They are more likely to pay you ahead of others if you have a solid relationship and don’t allow them to forget their outstanding balance.

If you see any of these signs, act before it’s too late:

1. Broken promises – 2 instances. Your customer has promised twice to pay and you still have not received payment. Accept one promise. The second time, ask in a direct, friendly way why the payment is late and exactly when you'll be paid. You may also notice other delays which should be counted as one instance, including a bounced check or inability to reach your contact.

2. Change in personnel. Your lack of payment is blamed on personnel shifts and your original contact is no longer available. Always assume the worst. Call daily to attempt to reach the right person, and set a firm schedule for when they will call you back. No return call should be considered a broken promise.

3. Any banking change. If nonpayment is blamed on changing banks, ask for the name of the bank and bank officer. Call the bank and confirm that they have actually opened an account. Even with a new bank, payments can be processed quickly, so excuses of this nature are a red flag.

4. Unusual disputes (stalls). Every time you call there is a new excuse. For instance: “The check is in the mail” or “We are having a problem with the order” (after several months). Probe and question. If the check is in the mail, request a date mailed and a check number. Volunteer to follow-up with their bank. If the customer has a valid problem with their order, their complaint is usually prompt and detailed. The more vague a complaint, the more suspicious it should be. Ask: “Why haven't I seen something on this in writing?"

5. Intimidation. Debtors sensing a non-pro calling may be rude to deter future calls. Ignore it. Stick to the business at hand: nonpayment. Keep probing. “Will you pay? when? etc.” Try humor (“Get up on the wrong side of the bed?”). If it fails, the intimidation is deliberate. Ask for a supervisor or manager.

6. Change in payment pattern. A customer who normally pays you within the month is now taking 60 days to pay, and only after you call. Call them and compassionately discuss the situation. Tell them what a valued customer they are and how wonderful they have always been about paying you on time. If there’s no valid temporary situation, this is another red flag.


What to do when it’s already too late
Unfortunately, after several months have passed, it becomes extremely difficult to collect anything at all. Avoid making unrealistic demands and try to work with the customer if you can. Your goal is to keep the lines of communication open. Why lose money, and possibly a good customer, due to a customer's temporary, unexpected reversal?

Focus on keeping a regular flow of cash coming in, by setting up a realistic payment schedule as follows:

1. Get a partial payment up front: “Your total outstanding balance is $600. How short are you of paying in full?” It's hard for people to say they're short the full amount. Get a commitment for a payment up front and ask how much they can pay per month after that. By getting a payment right away, you have won half the battle and have started the cash flow moving again.

2. Suggest monthly payments. After the initial down-payment, set regular monthly payment amounts that will pay off the balance in a reasonable period of time. Set a limit for how many months the payments will be spread out. Suggest an amount, but have a counter-offer ready. Watch carefully that payments are paid on time.

3. Charge interest. You should definitely charge interest on balances owed to you longer than 30 days. Typical interest is 1.5% to 2% per month. People pay back debts accruing interest faster than no-interest debts. You may also charge a flat late fee for missed payment dates.

4. Suspend services. Don’t provide additional services to a delinquent client. You’re just adding more to the amount you will be unable to collect. For a client that is making payments on current services, set up a payment plan for them with an amount that covers the current services plus an amount towards the back balance. Set a limit for the maximum balance you will allow and suspend services if it reaches that point.

5. Collection Agencies. If all else fails, the account can be turned over to a collection agency. They will call and send letters on your behalf to collect the debt. This is usually a last resort, however, since you will most likely not be able to do any further business with this client. Collection fees typically cost about 30% of the debt collected. Some money is certainly better than no money, but again a last resort.

This information is based on an article by attorney Donald B. Kramer, J.D., president, Kramer & Frank, P.C., St. Louis, MO, a 23-attorney collections law firm, and author of Mastering Collections (AIPB, 2009).