Common payment traps to avoid

Whether your business is new or well-established, it’s easy to get caught up in the day-to-day and fail to realise you’ve wandered into a situation that leaves your business exposed.

It might feel great to get a large order. But if you have to commit significant resources to fulfilling it and payment is delayed (or end up not getting paid at all), it can be too good to be true. 

If you get a large order:

• Make sure you've checked your customer’s creditworthiness and received guarantees
• If possible, ask for a deposit or arrange for progress payments.

These steps will improve your cash flow and reduce your exposure.

Having a large proportion of your business come from one customer can have benefits. For example, if it allows you to get volume discounts, or build up a long-term relationship that gives you a steady and stable source of cash.

But if that customer exits the market or goes under, your largest source of cash flow could disappear overnight – sending you into the red.

If you’re a new business, be aware that you could be a target for people who have exhausted their credit (and credibility) elsewhere. 

The good news is there are proactive steps you can take to reduce your vulnerability and prevent yourself from falling into these payment traps.

If your business is dependent on one customer (or just a few customers), make customer diversification a top priority. It’s better to spread your risk over 10 smaller customers or clients than be dependent on one large customer for your business.

Make sure you’ve checked your customer’s creditworthiness and received guarantees, especially if they’ve placed a large order. If possible, ask for a deposit or arrange for progress payments. These steps will both improve your cash flow and reduce your exposure.

For late payers, it’s important to get on top of the problem early. Not only will it help you avoid the issue escalating into something much more serious, but the earlier you start your credit control, the more relaxed you can make your initial contact. 

Once you’ve got an efficient invoicing system, review all your credit accounts regularly and contact those who have not paid within the agreed period. A phone call is best, so you can talk to a real person.

There’s no hard and fast rule that you must request ‘payment by the 20th of the month following invoice date’. In fact, this could mean you only become aware of a problem up to 50 days after your first sales of goods and services. In the meantime, your customer might have bought even more from you, adding to the debt problem.

Aim to shorten your payment window for new customers. The advantage of requiring payment within a shorter time period – such as seven days – is you can send out three reminders within the first month. If people have accepted your credit terms, then you have a right to expect payment on time and you’re entitled to contact them if this doesn’t happen.

Be firm but fair. Most people are honest and will pay on time.

Stay in touch with what’s happening in the business community so you’re one step ahead. 

Joining networks, your local industry group, chamber of commerce, or the Employers and Manufacturers Association can help you keep your finger on the pulse. Ask an ANZ Business Specialist for details.