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How to Get Your Credit Card Receivables Faster for Your Small Business

In today’s challenging economic times, managing cash flow is more critical for small businesses and startups than it’s been in decades.

Whether it’s price increases because of inflation and supply chain problems or the rapidly rising cost of labor, most small business owners and entrepreneurs have seen their expenses rise at unprecedented levels without corresponding revenue increases. Add to this the fact that cash-strapped consumers are delaying payment for the goods and services they purchase because they have their own cash-management issues. Taken together, these factors result in significant small business cash flow problems.

Well-run companies can usually handle short-term cash flow challenges. However, even the best-managed businesses may end up in severe financial trouble if they are cash-strapped for a long time. That’s the case for many small companies dealing with these issues for a year or more.

One of the ways small business owners can deal with their cash flow problems is to speed up their credit card payments to bring more revenue in the door faster. This article explains how to reduce your accounts receivable balances and get paid quickly.

Get customers to pay on time

These tactics can help you receive credit card and other payments from customers faster.

Offer an incentive for paying early and penalize late payers

A common tactic small business owners use to get paid faster is to give customers a small discount if they pay within a particular time. A five percent discount is often all it takes to get people to pay their bills more quickly. The money you forfeit by offering a discount could more than pay for itself by getting your payments faster. Your accountant can help determine if offering early-payment deals could help improve your bottom-line results.

Similarly, consider whether it makes sense to charge late fees, interest, or finance charges for late payments. Sad truth: Many customers need an incentive not to pay bills late. It’s common for many small businesses to tack on additional fees when an account is 15 or 30 days past due. Getting charged extra is often all it takes to get a response from a late-paying customer. Before you make this move, think through the balance between the benefit late fees could have to the bottom line of your business and the customers you could lose by making this change.

Do your due diligence on prospective customers

Check up on all potential customers before you agree to do business with them. Review their credit report, and contact references to find out if they pay their bills on time. This will help you avoid doing business with people with a history of not paying on time.

Think of it this way. As a business owner, you provide goods and services before getting paid in advance for them. This is a form of credit that makes you a lender. Lenders check credit to manage risk, and it only makes sense for you to do the same. It may cost you some money to get credit reports on prospective clients, but it could be worth it to avoid bringing on bad billpayers.

Report late-paying customers to credit bureaus

Individuals and businesses care about their credit scores because they significantly impact their ability to qualify for loans, lines of credit, credit cards, and even jobs. Reporting customers’ payment history to credit bureaus like Dun & Bradstreet, Experian, and Equifax motivates them to pay their bills on time.

If you decide to report customers’ payment history to credit bureaus, tell them about it in advance and make it clear that it’s company policy. If a customer is consistently late making their credit card payments, you’re reporting them, and it will harm their credit rating. It can be a powerful incentive to get them to pay their outstanding bills.

Take away customers’ ability to pay with credit

You can definitely improve your cash flow by requiring customers to pay for goods and services when they’re delivered. Many people and businesses may find this unacceptable, but it’s the only sure way to get paid immediately. Before you make this move, you must disclose it to your customers, who may choose not to do business with you. For those who don’t want to accept this change but have a solid history of timely payments, you could consider offering them reasonable credit terms, for instance, 30 days. Or you could only make this change for customers who have a poor payment history.

Use capital to cover the cash flow gap

What can you do to improve your business cash flow if you can’t get customers to pay faster? Here are some options to consider.

Leverage a business credit card

Business credit cards can help owners gain some level of control over their expenses. They provide a buffer when accounts receivables increase. Although interest rates on credit cards can be high, you can limit interest if you pay balances off quickly. Sometimes, you could receive the equivalent of an interest-free thirty-day cash advance if you pay in full before the monthly due date.

Business credit cards typically come with higher limits than personal cards. Borrowing limits are based on the owner’s personal credit score and income and the company’s revenue. Business credit cards are relatively easy to qualify for, and making payments on time could help your business build credit. The better your personal and business credit scores, the lower the interest you’ll pay, which is critical during this time of rising interest rates.

Secure a business line of credit

Many business owners depend on a revolving line of credit through a business credit line to get through periods of poor cash flow. Similar to a credit card, the line of credit limit is based on the financial standing of the business and the owner’s credit history. A business credit line comes with a set amount you can borrow against when you need to. You only pay back the money you borrow, along with interest on it.

A line of credit is typically more challenging to qualify for than a credit card. The lender considers the age of the business, its revenue, balance sheet, credit rating, customer makeup, and other factors when reviewing credit line applications. You can get a business credit line through a traditional bank or online lender. It’s usually easier to get approved through an online lender versus a conventional financial institution. However, their interest rates are typically higher. Take time to understand the total cost of interest and other fees before using a line of credit. If the cost of borrowing is too high, it could make your cash flow issues worse.

Factor or finance outstanding invoices

Another fast source of cash is accounts receivable factoring, often referred to as invoice factoring. You sell your outstanding accounts receivable to a factoring company. It pays you a percentage of the total value of those invoices, typically between 70 and 90 percent of the value. The factor handles the collection process with customers. This could harm customer relationships. Your business may receive most of the rest of the money later once it’s collected, minus a factoring fee of between one and five percent of the value of your invoices. Invoice factoring only used to be available to larger companies, but some factoring businesses now offer the service to smaller ones.

Other companies offer accounts receivable loans. These allow small business owners to take out short-term loans on the value of their unpaid invoices. In this case, you’re not selling the invoices to a third party. They’re simply acting as the collateral on a loan. The lender collects payments from customers and pays interest on the loan amount. Interest rates vary from five percent up to 20 percent or more.

Note: Other types of business loans, such as term loans, are typically not a good solution for covering late payments and other working capital issues. They’re usually better for larger, longer-term business needs.

Credit insurance

Another thing to consider is getting credit insurance. It reimburses companies for invoices they’re unable to collect. It typically costs about one-half percent of the amount covered. It allows you to collect the invoices faster and prevent the risk of never receiving the money owed.

Require a deposit

Requiring customers to pay for a portion of their purchase right away can help businesses stay more up to date with their bills. Many companies require a 50 percent deposit. If the customer takes a long time to pay their bill or never pays, it has less of an impact on your bottom line than if you never collected the upfront payment.

Depending on the type of work you do, your business could also require a second installment when a certain percentage of the work is done and the final payment when completed. Be aware that it’s essential to have the same policy for all clients. It could harm your reputation if you have different policies for different people.

Better align your accounts payable with your accounts receivable

If your issue is that your accounts payable terms are shorter than your accounts receivable terms, take steps to align the two better. See if your suppliers are willing to give you longer terms. Now that business has picked up since the pandemic, vendors may be willing to offer more favorable payment terms than a year or two ago, especially if you regularly pay your bills on time.

Put payment policies in writing

At the start of every new business relationship, give customers payment policies in writing. Go over your policies as part of your onboarding process. If you do, customers cannot claim they misunderstood or were unaware of payment terms.

Be sure to highlight upfront discounts and late payment fees in the document. Use bold, underlined, or italic type to make this information stand out.

Invoice promptly

Sometimes business owners cause their cash flow issues. If they’re slow in sending out their invoices, can they expect to have them paid quickly? Think of it this way: If getting paid isn’t a priority for your business, why should it be a priority for your customers? An accounts receivable issue could be the result of poor billing practices.

If you handle your billing and regularly fall behind, have an accountant or CPA do it. It could be a worthwhile investment if it speeds up the payment process and improves cash flow. Or automate your business accounting and billing system and accounts receivable process with a solution like QuickBooks. It could help streamline your system so you get your bills out on time.

How to manage late-paying accounts

What if a customer constantly pays late or their behavior gets worse?

Stay courteous, especially if the customer is just a few days delinquent. Bring it up over the phone. Recommend paying at that moment with a credit or debit card. If the customer is 60 or 90 days behind, tell them that you are trying to clear up your accounts receivable and ask when you can expect payment. Show empathy and tell them you understand today’s economy could be making it hard to pay.

Be diligent. If the customer agrees to a payment date and misses it, follow up with a letter asking for immediate payment. Include a copy of the invoice and stamp it past due.

If accounts become more than 90 days past due, it’s necessary to become more assertive. Document what your next course of action will be, such as hiring an attorney or sending the bill to a collection agency.

Speeding your credit card payments: The bottom line

Small business owners cannot simply hope their customers will pay sooner or gently push them to make credit card payments on past-due invoices. They must realize they have some power over late payments and use it accordingly. Begin by doing due diligence on prospective clients by checking their credit history. Incentivize customers for early payments and penalize them for late ones. Make sure customers know their payment history with your business will have a lasting impact on their credit — and report them accordingly. In some cases, reducing credit limits or revoking credit terms may make the most sense.

If you find yourself short on cash due to missed credit payments, you have options. Using credit cards, lines of credit, or accounts receivable factoring and financing could help you make it through challenging times. Requiring customer deposits, renegotiating accounts payable terms, putting your payment policies in writing, and reviewing them with new clients could improve your cash flow.

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