In short:

  • Cash flow has long been a top challenge for small businesses, and customers that consistently fail to meet credit terms are a major contributor to this problem.
  • Companies can offer discounts, levy penalties, report payment history to creditors and more to encourage on-time payment from clients.
  • Credit cards, lines of credit, AR factoring/financing and other strategies are all worthwhile funding options that can get businesses the cash they need when AR lags behind.

For many small business leaders, cash flow is a nagging, unrelenting concern. Lack of capital is one of their biggest problems: 43% said covering operating expenses was their top financial challenge, and 86% said they would need to find additional funding or reduce costs if revenue halted for two months, per the Federal Reserve’s Small Business Credit Survey, conducted in late 2019.

However, not all cash flow challenges are the fault of small business owners. It’s often the result of rising accounts receivable (AR) balances and late customer payments that too many owners or leaders treat as an unavoidable issue they must work around.

Late payments are an especially big problem in the B2B world, in which trade credit is commonplace and payment is not usually due at the time of purchase. U.S. businesses have a cumulative $3 trillion in outstanding invoices on any given day, per a report from PYMNTS and Fundbox. And 68% of companies that receive at least half of their payments late report cash flow is an issue.

The coronavirus has not helped matters: Experian notes the number of small businesses with bills 31-90 days late increased slightly in the second quarter of 2020, and the credit bureau expects that trend to continue in the coming months.

Small business owners know firsthand that collecting AR can be like pulling teeth. And when you can’t get those hard-earned dollars from their buyers, it can put you in a pinch as your business’s own bills start coming due. Some organizations may have different schedules for AR and accounts payable (AP), like net 30 vs. net 60, leaving them in a particularly difficult spot.

As we see it, there are two ways to resolve this problem: convince more customers to pay on time, or secure access to capital to get through that stretch when funds run low.

The first is proactive and the preferred solution, but it’s often easier said than done and not the golden ticket for all businesses. This is especially true when working with larger companies that recognize their power to pay you on the terms they choose. But both options can give small business owners the cash injection they need to avoid sweating out the next payroll period or stressing over their sinking credit as AP falls behind.

Approach #1: Pushing Customers to Pay On Time

For small businesses that fight to squeeze every dollar out of their customers and often receive payments days or weeks after their due date, these tactics can encourage faster settlement:

1. Incentivize early payments, and penalize late payers

A popular strategy is to give customers a small discount — 5% is common — if they pay on or before the due date. This is one of the first moves a small business watching its AR balance climb should make, according to Paul Miller, a CPA and founder of the accounting firm Miller & Company, LLP. It gives the buyer a direct financial incentive to stay on top of payments. And, the money you may forfeit by offering a discount could more than pay for itself by giving you cash right away, which you can then put toward initiatives that will help the company grow.

Similarly, if a client is late, don’t hesitate to hit them with late fees, interest and/or finance charges. Sad truth: Many customers need an incentive not to pay bills late. Lindemann Chimney Supply, a distributor of chimney supplies and tools, usually adds finance charges when a bill is 15-30 days past due. Leadership has found it often sparks a response from the customer.


6 Common Invoicing Problems and How to Solve Them: Confusing or error-riddled invoices can lead to late payments, while ones that cleverly incentivize customers to pay can help to close your AR gap. Learn more.

2. Investigate prospective customers thoroughly

Do your research on all potential customers before you ever sign contracts or onboard them. Check the buyer’s credit report, and ask for references to gain a better idea of what to expect from a customer. This helps you avoid slow-paying clients before they ever become a problem.

“What I say to business owners is any time you’re providing anything without getting paid in full upfront — whether it’s your time, your expertise, your staff, your goods — you’re a lender, and lenders check credit, and lenders try to manage risk,” said Gerri Detweiler, education director for Nav, a financial services provider for small businesses.

Some companies may not have a credit history, either because their current vendors don’t report them or they haven’t been around long, in which case references become all the more important. Although business credit reports are more expensive than consumer ones, a few different services offer packages to check the credit of multiple prospective clients.

3. Report customers to credit bureaus

Companies care about their credit because it affects their ability to qualify for loans, lines of credit and perhaps do business with new partners (if those partners check reports). Reporting customers’ payment history to credit bureaus like Dun & Bradstreet, Experian and Equifax gives them additional motivation to pay on time.

If you decide to start reporting customers’ payment history, make sure you tell them about this upfront and express that it’s part of company policy. If a client is consistently late, it may be worth a second warning that you’re reporting their history and will affect their rating. This can be “another powerful incentive to pay on time,” Detweiler said, because customers know that not meeting your terms could hurt them elsewhere.

4. Revoke credit terms

When the coronavirus turned the economy on its head in March, Lindemann Chimney Supply went into self-preservation mode. It pulled credit terms from about 95% of its customers, requiring them to use a credit card for all purchases, and rescinded sales reps’ ability to grant trade credit.

“We actually improved our AR pretty significantly because of COVID, because we needed to tighten down, and we needed to collect cash flow because, in March and April, everything was up in the air, no one had any idea what the heck was going on,” said Michael Schaefer, director of operations. “Three-month, six-month, one-year plans were out the window at that point.”

Most of Lindemann Chimney’s customers, which include chimney installers, sweepers, masons and roofers, were understanding. The small group of customers that kept their usual terms had “an impeccable payment history,” Schaefer said. All were put on net 30 terms. (A handful of buyers previously had 60- or 90-day terms.)

Since making those changes, Lindemann Chimney’s average days sales outstanding has dropped from 40-plus days to 27 days, and its total outstanding AR balance has fallen. The Chicagoland business slightly loosened its rules in September, increasing the credit limit for some customers who have kept up with payments and frequently hit their limit.

While revoking credit terms is not something every organization could do, it’s certainly a powerful way to get your customers’ attention and eliminate the risk that comes with this payment structure. Small business leaders should analyze the payment trends of their customer base and consider requiring immediate payment from the most sluggish ones.

“A lot of customers will see it as a slight, like you’re hurting them or it’s personal, and you just have to communicate to the customers, it’s impersonal, it’s data-driven, it’s numbers, it’s not feelings,” Schaefer said. “You’ve got to have some strong processes and rules that are communicated internally as well as externally.”

Approach #2: Covering the Cash Flow Gap With Capital

Perhaps you have a number of enterprise clients, or competitive forces prevent you from putting customers on a tighter leash, so the strategies listed above don’t change customer behavior for the better. If it’s time to look for ways to boost capital, here are a few options:

1. Use a business credit card

Much like personal credit cards, business credit cards can help owners spread out their expenses, giving them the buffer they need when AR lags behind. Miller notes a credit card could give companies a full month of cushion if they time it right and pay an invoice on the day the cycle resets. For example, if a statement closes on Oct. 28, a business could make a payment on Oct. 29 that could be paid off interest-free as late as Nov. 28.

Small business credit cards usually have higher limits than personal ones, but it’s based on the owner’s personal credit and income as well as the company’s revenue. These credit cards generally aren’t too hard to qualify for, and consistent on-time payments could help your business build credit.

Best Small Business Credit Cards

Start your search with roundups from sources like:
Interest rates for these credit cards range from about 10-25%, with the median interest range for most cards in the teens.

2. Get a line of credit

Many businesses count on a revolving line of credit from a bank to mitigate cash flow problems. Much like with a credit card, the limit is based on the business’s financial standing. It may get a line of credit for $40,000, for instance, and can pull out any amount of money as necessary, up to that limit. Unlike with a credit card, interest kicks in right away, but the interest rate at most large banks starts around 4.5-7%, which is lower than most credit cards.

A line of credit can be more difficult to secure than a credit card, with a company’s age, revenue, balance sheet, credit rating and customer makeup all factors. A company’s primary bank usually offers the best interest rate, but younger businesses or those in industries considered high risk could turn to alternative lenders with less forgiving rates, according to Detweiler. Make sure you understand the total cost of interest and others fees before using a line of credit.

3. Factor or finance AR invoices

Another fast source of cash to consider is AR factoring, also called invoice factoring. This entails selling your outstanding AR to a “factor,” which pays your company a percentage of the total value of those invoices, often 70-90%. The factor collects payments from customers, which could damage those relationships, but your business sometimes receives the rest of the money later, less a “factoring fee” (usually 1-5%). Although many factoring companies do most of their business with larger enterprises and historically don’t work with smaller ones, Miller said some have opened up to a broader audience due to the economic impact of the coronavirus.

Miller recommends pairing AR factoring with credit insurance, which reimburses companies for invoices they’re never able to collect on and typically costs .25-.5% of the total amount covered. That allows the business to get the capital it needs right away while eliminating the risk of never receiving the full amount of money owed.

BlueVine is one invoice factoring company that gives you up to 90% of your AR balance upfront, then gives you the remainder of the balance later (minus fees) if customers pay their invoices. BlueVine offers loans of up to $5 million, with weekly interest rates starting at 0.25%.

Other companies offer accounts receivable loans, which let companies take out short-term loans based on the value of their invoices (the collateral) without selling the invoices to a third party. The lendee collects payments from customers itself and then pays interest that’s based on its own credit standing. Interest rates vary from about 5-6% at banks to 10-20% with other firms.

Fundbox is one AR loan vendor that gives out 12-24-week loans of up to $150,000 based on a company’s transactions (including AR and AP) and other credit factors. The seller makes weekly payments, with interest rates that start at 4.66% for 12-week loans and 8.99% for 24-week terms, though the rates can be much higher.

4. Require a deposit

Requiring customers to pay for part of their total purchase immediately, while not a perfect solution, could help businesses keep up with their own bills. Miller’s clients must give him 50% of the money for his services upfront, and he suggests all businesses collect a deposit, even if it’s a small amount. If the customer takes months to pay their bill or disappears entirely, it has less of an impact than if you never collected that upfront payment.

Your company could also require a second installment when a certain amount of the work is done, and the final payment upon completion. Note, however, that it’s important to have the same policy for all clients.

“You can’t just pick and choose,” Miller said. “You have to have a consistent pattern and treat everybody the same, because people talk.”

5. Renegotiate with your suppliers

Companies that struggle with AP terms shorter than their AR terms should do everything in their power to better align the two. Some of your suppliers may be open to giving you longer terms if you explain that industry standards or other conditions require you to give customers more time to pay. Business may have remained steady or even increased for certain vendors during the pandemic, so extending terms may not be a big ask at this specific time.

“You can negotiate longer terms with your suppliers and vendors, and that’s especially the case if you’ve been a good customer, if you generally do pay on time, and if you have good business credit,” Detweiler said.

You’ll need to make sure credit bureaus know about any changes to terms. Otherwise, payments that are on time under the new agreement could be marked as late.

Firms’ received payment termsShare that receive payment select terms durations, by persona

  Early-stage Intermediate Established Early-stage Intermediate Established
0 days 4.2% 7.6% 8.2% 4.2% 3.9% 3.7%
1-15 days 30.4% 23.9% 20.0% 18.5% 9.4% 19.8%
16-30 days 42.9% 40.8% 38.8% 33.6% 35.6% 37.7%
31-60 days 18.3% 23.4% 25.3% 34.5% 40.6% 23.5%
61-90 days 3.1% 3.3% 6.5% 8.4% 9.4% 11.7%
More than 90 days 1.0% 1.1% 1.2% 0.8% 1.1% 3.1%

Data: “SMB Receivables Gap Playbook,” from PYMTS and Fundbox, based on 2019 survey of 1,000 businessowners and execs

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Bottom Line

Small businesses cannot simply hope their customers’ behavior will change or gently push them to pay those past-due invoices. Companies must realize they wield some power here and use it accordingly. That starts with doing due diligence on prospective clients, incentivizing and disincentivizing customers for early and late payments, respectively, and making sure customers know their payment history will have a lasting impact on their credit — and reporting them accordingly, aided by accounting automation software. In some situations, reducing or even revoking credit limits may be justified.

And when organizations find themselves short on cash due to uncollected bills, they have options. Credit cards, lines of credit, AR factoring/financing, deposits from customers and changing AP terms could all inject small businesses with the capital they need when stretched thin.

In many industries, extending trade credit is table stakes, and convincing customers to stay on top of their payments will be a persistent challenge. But if you stop dismissing late AR payments as a “cost of doing business,” your business will see the results reflected in healthy bank account balances.