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Small Business Payment Blunders – Three ways to avoid Mistakes

 The softness of the pillow was making it no less painful. I was trembling. Shifting. Turning on either side. Finally! a shout, a loud shriek and I woke up. It was a dream – nay a nightmare – one that I would never want to live.Unpaid Invoices/ Overdue Invoices – these were the most dreadful words in my Dictionary until recently. Such nightmares had become commonplace. Ever since I had started my journey into setting up my own small business, the one thing that hurt me the most was delayed payments.

Start of Business Journey

When I started the journey, it was the fear of finding customers. But soon enough, customers came in. I was the happiest when I received my first order. Elation and celebration overtook me and overpowered me. From then on started my learning curve into the world of managing a business.It was my grandfather who told me – ‘Son, the majority of the small business fail because they are not well managed. It is not because they don’t sell good products or services. Don’t get into that trap’.Those words did not have the intended effect when I first heard them. But few months into my own setup, it made all the sense in the world!When me and my friends started our own venture, we went into great depths into the product engineering. We researched endlessly, fought over the most mundane things to make our product perfect. But little did we know that the true game was only to begin when we started receiving our orders.

Initial Learnings

When we realized that our first customer did not pay, we were busy trying to sell to another customer. In the process of getting the new order, we did not pay much attention to the earlier order. Our dedication was such that we only thought of order fulfillment not of payment realization. The oxygen that we needed was left in the backburner.So, there began our meandering journey into the world of unpaid customers and overdue collection, making us go back to the basics of running a small business!In this series, I will share with you our mistakes and the course correction we undertook. It is my father who says “Wise men learns from Other’s mistakes”. Well, we weren’t wise enough – hopefully, we can share some of our learning and enrich you with distilled wisdom.Hold tight –

#1 – The Payment terms!

There are a few nuances which you can sort out to be on top of your cash flow. As I said, we learned this the hard way – I sure hope you enjoy the benefit of our experience.It is always best advised to make your payment terms crystal clear in your initial proposal. Be bold and confident when it comes to your product. There is no reason for you to be shy about it. Just as you need to be confident with the pricing, you should also be with the payment terms. Clearly articulating that is a first step towards realizing your payment on time.As an industry best practice, it is always advised to go for Advance payment. Though it will be difficult to get the full amount as advance, partial advance payment will also be a great relief. Not only will it give you a good bit of energy pump, but it will also take the burden away from you when it comes to payment collection upon project completion.Proper structuring of your payment terms can be a deal winner in many cases too. Mention the project phases and the different payment percentages against each milestone very clearly; it makes it all the more easier for final negotiation even during the deal closure.

How to handle Credit

Now it is not always that you are able to collect advances, at times you may have to give the customer credit. In this case, try to go for a guaranteed credit which will ensure timely payment. What I mean is either a letter of credit from a local bank or an avalized draft from a bank. If none of that is possible, you could make the documentation of your product delivery go bank to bank to ensure the documents are verified and acceptance notice is given to the bank. This is easier when you are delivering products cross country.In the worst case, that is in the absence of any sort of guaranteed payments, you are forced to give an open credit otherwise you simply are not going to make the business. In such cases, first and foremost, you will have to do your due diligence.

#2 – Due Diligence

Now when it comes to customers, you could be dealing with different spectrums. Some are like big fat elephants – that means they are heavily loaded with bundles of cash – or so you think as you do your research about them. They may have big offices, lots of staff, fancy facilities, but when it comes to vendor management, it can be a completely different story. So, it always pays to check with another vendor to understand the customer better.If you happen to deal with smaller players, whom you are not able to research much into, it becomes very important to establish a credit history before you go all out and open up an entire credit line the size of an Airbus A380!. It is always advised to start with a small credit line and stress on the fact that you will be giving them a bigger credit line based on their payment history. This will give them an added incentive to honor your payments on time so as to get a bigger credit line or longer credit term.Another way out is to go for partial credit – that is you collect a percentage in advance and the balance you extend credit term. But in all cases, err on the side of caution. Don’t let the excitement of the first order kill you when it comes to payment realization.

#3 – The Written Word

The pen is mightier than the sword. It is not simply said that way. Whatever you do, you best serve your interest if you have it clearly written and duly signed by all the stakeholders. Be it you Proposal, or your contract, it is vitally important that you clearly mention the project milestones and the associated payment plan.Be sure to capture all the relevant details in your Invoice. Be it the order no:, the contract date, the date of delivery and the most important data – the payment due date. Do not leave that open and always try to keep it very simple by mentioning the exact date. If you are not able to do so, put it plainly as the no: of days from Invoice date. That leaves no ambiguity and leaves it crystal clear for the bookkeepers to handle.