According to recent data, about 80% of Canadian small businesses experience cash flow problems at some point in their lifecycle. In many cases, late payments can cause more than just inconvenience. Unfortunately, when money stops moving, supplier and consumer relationships, payroll, tax planning, and day-to-day operations can be negatively affected. That’s why slow-paying clients for a small business in Canada can be its downfall.
Given the serious repercussions of late payment for a small business in Canada, it’s important for business owners to learn how to deal with slow-paying clients. In today’s blog, our team at Bizfund is sharing our strategies for preventing late payments and what to do when collecting overdue invoices becomes necessary.
Hopefully, armed with this advice, you won’t have to spend precious time chasing down money you’ve already earned, nor will you have to face delayed growth.
Why Clients Pay Late
There are many reasons why clients pay late, and these reasons usually fall into four main categories. If you understand these groupings, you’ll have a better sense of how to choose the right response to the situation. This means you’ll avoid reacting emotionally or inconsistently, which we understand can be easy to do if you’re not paid what you’re owed:
Cash Flow Issues On Their End
Some of your clients may be experiencing delays in receivables or seasonal downturns. If you’re dealing mostly with other Canadian businesses and suppliers, this could be a likely explanation, given the current state of the business market.
However, while understandable, this still shifts the financial burden to your business, making their cash-flow challenges your operational problem.
Disorganization
Another reason clients might not be paying you is that they are highly disorganized. In many situations, clients will have invoices like yours sitting in their inboxes waiting for approval for weeks or months. In other instances, these invoices could get lost in internal processes.
If you’re dealing with companies without structured accounts payable systems, this is a common issue you may encounter. Unfortunately, these delays are frustrating, but they are also solvable if you and your clients communicate more effectively.
Dissatisfaction or Disputes
If you run a business in Canada, no matter the industry, you need to prepare for the reality that some clients will be dissatisfied with your services. Often this will be due to no fault of your own, but the client won’t ever see it this way, and as a form of retaliation, they could refuse to pay. This often leads to disputes and delays in your business receiving the money earned.
Not to mention, you may not even realize a customer has a dispute with your business if there has been no communication. This could leave you with an unpaid invoice for weeks or months, so it’s important to stay on top of things and follow up with clients to resolve disputes.
Taking Advantage
You don’t want to hear it, and we don’t want to say it, but some clients delay payment simply because they can. They take advantage because they know that a small business rarely has the means to pursue legal action.
In many situations, these types of clients will treat your payment terms as flexible, even though this isn’t the case. If you ever sense this could be the case with a customer, it’s best to cut ties after securing payment.
Prevention Strategies
As they say, prevention is better than a cure, and this old adage applies to the business space too. So, let us share our wisdom and help you avoid dealing with slow-paying clients that can seriously affect your cash flow and day-to-day operations.
Here’s a look at a few of the best prevention strategies to try:
Clear Payment Terms Upfront
The clearer your payment terms are, the less likely your business is to experience payment delays. Usually, the best thing to do is clearly outline due dates and payment terms, such as Net 15 or Net 30, in every proposal, contract, and invoice. You also want to avoid vague language, as that can leave room for interpretation, and this could come back to haunt you.
Credit Checks For New Clients
An excellent practice is to perform credit checks on any new clients you choose to do business with. Typically, the best move is to check publicly available credit references or request trade history for larger contracts, as this can reveal potential warning signs. Try to gather this information before you establish any working relationship, so you don’t encounter collection disputes later.
Requiring Deposits
This won’t work for every type of business, but another great way to avoid collections later from late or slow-paying clients is to require deposits. Statistically, clients who pay deposits are far less likely to delay final payments. So, with a deposit, you can ensure your business isn’t fully exposed to financial danger before work begins. Plus, a deposit helps you clearly articulate that payment is part of the process.
Multiple Payment Options
When you offer multiple payment options, you eliminate excuses for non-payments. Usually, it’s best to accept payments through Interac e-Transfer, online payment portals, and credit cards. At the end of the day, the easier you make it for someone to pay you, the faster clients tend to do so.
What to Do When Payments Are Late
Even if you put into practice the strategies we spoke of above, there will always be outliers and those who pay slowly or not at all.
That’s why, in these situations, you need a structured follow-up process. It can help you secure payments, remain professional, and negate the chances of it happening again with problem clients:
- Develop a professional follow-up sequence: You don’t need to develop anything complicated. If a payment is running late, it’s best to start with a friendly reminder a few days after the due date. If no payment is forthcoming, send a firmer message a week later and continue doing so at regular intervals. Just be sure your messaging doesn’t come across as emotional and remains consistent.
- Decide whether you prefer phone or email: For late or slow-paying clients, a phone call can be a good choice because it can resolve the issue faster. However, an email is often preferable because it creates a written record. If you’re struggling to decide between the two, embrace both approaches. You can call to resolve any surface-level issues, like a lost invoice, and email to document that the call took place and why.
- Know when to escalate: It can be challenging to know when to escalate slow payments. Usually, after 30 or 45 days without payment or communication, escalation is necessary. Usually, to escalate matters, your business will issue formal notices, suspend services, or involve third parties, such as collection agencies.
Legal Options in Canada
If you have an invoice for a significant amount that is overdue or unpaid, this is when legal action might be a good idea. Unfortunately, if you’re owed smaller amounts, the cost and time it takes to pursue legal action can outweigh the benefit. If you are considering legal action, here are two options:
Small Claims Court Limits By Province
If your invoice for monies owed sits between $25,000 and $100,000, you could approach the small claims court in your province. The exact amount varies by province, so be sure to double-check. The small claims courts are designed to be easily accessible to businesses.
You can go this route without worrying about expensive legal representation. However, with the small claims court, it’s incredibly important to have documentation as evidence to improve your chances of recovery.
Collection Agencies
If you don’t want to have to chase down payments yourself, as let’s be honest, many small businesses have more important things to do, like keeping afloat and operational, you can engage a collection agency. This agency will act on your behalf and pursue payment on your behalf.
However, you need to know that their efforts will require compensation, which is usually a percentage of what they are recovering on your behalf. For many slow payers, the involvement of a collection agency signals seriousness, so there is a better chance of you recovering what’s owed.
Protecting Your Cash Flow
The reality is that while you’re addressing late payments, your business still needs to operate. This can leave you feeling helpless if you don’t know where to turn, but you have options.
Below are a few financing tools you could use to help your small business bridge the gap created by delays in receivables:
- Factoring invoices: With invoice factoring, you can convert your company’s unpaid invoices into immediate cash. If you choose this option, it will help you keep operations running without you needing to wait for clients to pay.
- Lines of credit: You can apply for a line of credit for your business when you’re experiencing short-term cash flow gaps. With a line of credit, you’ll only borrow what you need, and you can repay it when your payments arrive. It’s a good option for stabilizing operations without creating long-term debt.
- Merchant cash advances: One of the best options for bridge financing is a merchant cash advance (MCA). With an MCA, you’ll gain access to quick working capital when your payments slow and operations are affected. Usually, with an MCA, your repayments are tied to your daily sales, which makes them manageable during uneven periods.
The Key Takeaways on Slow-Paying Clients For a Small Business in Canada
In business, relationships matter, and it’s commendable to be understanding when payments arrive late. However, you need to learn to balance your client relationships with your business needs. If you want your company to succeed, you need to try to limit slow payments as much as possible. This is where prevention strategies come into play, and why you need a payment follow-up process in place.
It’s also why you need to know your legal and financial options. If you’re thinking it might be a good idea to secure financing through a merchant cash advance while you establish preventative strategies and processes for slow-paying clients, you can apply here with Bizfund. We offer quick access to funds up to $300,000.
