In an ideal world, all customers would pay invoices before the bills became due. Because this does not always happen, businesses are forced to make tough decisions regarding collecting payment on past due invoices. In some situations, it is best to get what you can now and make a plan to receive the rest at a future date.
If a client has begun falling behind on paying invoices on time, consider establishing an installment plan. This agreement outlines a payment plan for the future that breaks the invoice into manageable pieces for your customer. In addition, new dates are set for a customer to pay by. This allows the customer to start fresh with a new opportunity to pay on time, and the plan can become another legal, binding agreement. In case the client goes bankrupt, the plan can be used as further evidence regarding a claim to some of the client’s assets.
The greatest benefit of an installment plan is the ability to meet your client’s flexibility. Your client may be seasonal with a busy season approaching, or may have had a one-time expense to handle. Your client may be able to make 20 $50 payments instead of one $1,000 payment. Hatching out a plan to get what you can now and when you can expect future payments creates a specialized situation made just for your customer.
Psychology of New Due Dates
The concept of an installment plan or agreement to break up a large invoice ties into the psychology of your customer. It can be a daunting, overwhelming task for cash-strapped companies to try and pay a large invoice already past due. The goal is to prevent the customer from giving up; just because current payment may be impossible, there will be opportunities for payment in the future. Therefore, accepting partial payments alleviates the stress and burden of past due debts, creating a new positive mentality toward the bill.
Extending a client’s due date period is a simple yet powerful gesture of customer service. It is not something you are obligated to do; however, there are multiple benefits of doing so. First, you extend the window to receive payment, increasing the odds of getting payment. Second, future business can be salvaged if pressure is not applied. In addition, public customer reviews, feedback, evaluations, or comments are free marketing endeavors providing goodwill for your company.
Another benefit of arranging to collect payments in the future relates to interest revenue. By extending a past due invoice’s due date period, you are effectively loaning your customer money. Therefore, it is reasonable and customary to charge an interest fee for this “loan.” If you are not in need of the cash flow immediately, this is an opportunity to supplement your revenue with passive interest revenue. Keep in mind the goal is not to earn money; the top priority is to give an incentive to pay as soon as possible.