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How to Speed up Your AR Collection Process

MHC Marketing    November 7th, 2017  

How to Speed up Your AR Collection Process

What’s one thing that keeps businesses from succeeding? A lack of cash. “Ran out of cash” is the second most common reason why new companies fail, with the first reason being “no market need” for the business’ service or product.

Running out of money can be a particularly frustrating thing for a company, especially one that seems to have a steady client base and a regular stream of customers. But if those customers aren’t paying for the products or services they bought quickly, a business is apt to wind up in trouble. Knowing how to speed up the collection of accounts receivable is key to the continued success of your company.

It comes down to getting your customers to pay on time or early, and knowing when a client isn’t worth the stress and hassle. Here are several ways to improve AR collections at your company.

1. Invoice Quickly

The best time to send out an invoice to a client is ASAP. You shouldn’t feel awkward or greedy sending your invoices along as soon as you’ve finished a project or as soon as agreed upon by you and the client. Sending out an invoice quickly does several things.

First, it reminds the client that your company wasn’t doing the work pro bono and that payment is expected. The odds are likely that your clients are in business themselves and understand that you and your employees have to be paid for your services.

Second, invoicing quickly also sends your clients a signal that your company is a well-oiled machine. Invoices don’t get lost in the shuffle or passed on to someone else to handle. Just like the work you did for that client, the process of invoicing is handled quickly and efficiently. That can make your company seem even more attractive to a customer, making him or her more likely to return to you for repeat business.

Finally, when you invoice quickly, you can capitalize on the fact that your client is pleased with the work you did for their company. If you wait a week or longer, the client might have forgotten about your project or moved on to the next thing.

You shouldn’t feel awkward or greedy sending your invoices along as soon as you’ve finished a project or as soon as agreed by you and your client.

2. Break Up Your Invoices

Another way to get clients to pay quickly is to divide up your invoices. Instead of waiting until the end of a project to bill a customer, send a series of invoices, every month or every week.

Invoicing more frequently allows the client to pay in installments as the work is completed, instead of in one lump payment at the end, which can help make the total cost of your company’s services more manageable for a client. Think of it this way: would you prefer to make 10 payments of $10 or one larger payment of $100? Even though you end up paying the same amount, paying it in increments can be easier on your budget. Invoicing in increments can also help your company manage its cash flow and budget.

3. Send Clear, Easy-to-Understand Invoices

Whether you invoice once or multiple times over the course of a project, the clearer your invoices are, the more likely your clients will be to pay them correctly and on time. Itemize the services you provided to a client on your invoices and provide a clear description of what those services were and when you performed them.

Include the total charge for all services at the bottom of the invoice, making sure to include any relevant taxes and other fees in the total. Make sure to list and explain any additional taxes or fees on each invoice, so your client doesn’t have to call you to ask.

It’s also important to include any relevant information your client will need when they pay the invoice. For example, list your company’s vendor number, if your client assigned it one. Also include your employer identification number or federal tax ID on the invoice, plus contact information.

You might want to use plain language on your invoices to make things clearer for your client. Instead of including “Net-30” or “Net-60” at the bottom of the bill, write “payment is due within 30 days.” Another option is to write an exact due date on the invoice so that there’s no room for confusion over when payment is due.

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4. Simplify the Payment Process

The easier it is for customers to pay you, the quicker they will do it. But if you have a long list of requirements or restrictions, clients are likely to feel frustrated. They might not only put off paying your company, but they might also reconsider working with you going forward.

One way to make it as easy as possible for your clients to pay you is to accept multiple forms of payment. Some companies might prefer writing and mailing checks, while others appreciate the opportunity to pay using credit cards or by directly depositing the money into your business’ bank account. It might also be worth offering alternative payment options such as PayPal or Venmo. Many small business owners or freelancers accept payments using PayPal. They might appreciate the ability to pay your company with funds they have in their accounts.

Whether you invoice once or multiple times over the course of a project, the clearer your invoices are, the more likely your clients will be to pay them. 

5. Establish Good Relationships with Your Clients

If you want to be consistently paid on time, it helps to have an excellent relationship with your client. Although focusing on building relationships with the companies or individuals you work with will help encourage them to pay their bills, establishing a strong bond between the two of you will do more than get clients to open their wallets.

Here are a few things you can do to connect with the people or companies your business works with.

Be Polite: Remember to be gracious and courteous in all your interactions with a client. In your emails and other communications, use words like “please” and “thank you,” for example. Being polite can go a long way towards building up a relationship with a client and making sure you get paid.

Remember That Clients Are People, Too: It’s easy to get so focused on providing a particular service to a client that you forget the individuals you’re working with are people also. Go out of your way to find out small details about your clients’ lives, such as when their birthdays are, if they have pets or kids and what their favorite hobbies are. That way, you can send a card on their birthday or chat with them about a shared hobby.

Pay Attention to What’s Going on in Your Client’s Business or Industry: Like getting to know your clients on a personal level, keeping up with what’s going on in the industry or with his or her company shows that you care. You might even customize the pitches or ideas you have for a client based on what current industry buzz is.

Remember the Golden Rule: Treat your clients the way you’d want to be treated by a vendor. If a vendor was always late or started turning in sloppy work, you’d most likely cut ties with him or her. But if a vendor was always going above and beyond, you’d most likely want to continue or even expand the relationship you had with him or her.

Make Every Client Your Number One Client: You should treat your clients equally, that is, you should treat them all like they are your best, favorite client. When you put your client’s needs first and treat them like they are the only customer you have, you increase the likelihood of them paying you on time and the likelihood of them referring your business to other businesses.

Stay in Touch: If a client reaches out to you with a question, respond as soon as you can, rather than waiting a few days or longer. You can also reach out to clients to check in on them and see how they are doing if it has been a while since you were in contact.

6. Send Payment Reminders

Another way to speed up the collection of AR is to follow up on accounts that are delinquent or are about to become delinquent. If a payment due date is approaching and you haven’t heard from a client about the invoice, it’s a good idea to send a reminder notice.

The first reminder should go out about a week before the due date, especially if you sent the invoice out a month or two earlier. You don’t want to send too many payment reminders, as the bill isn’t technically due yet and you don’t want to risk upsetting or annoying your customers.

You also want to be careful when choosing the language you use in the reminders. Keep things friendly, but professional. In the reminder, state the due date is approaching and when the due date is. It’s also helpful to remind the client of the payment methods you accept and direct them to a payment website if you have one.

One easy way to send payment reminders is to set up an automated system that sends them for you – as long as the system can recognize if the bill has been paid early and doesn’t need a reminder.

If you want to be consistently paid on time, it helps to have an excellent relationship with your clients.

7. Follow up with Delinquent Accounts

Once the due date has gone by and you haven’t received payment from a client, you want to get in touch with a reminder as soon as possible. The longer you let an unpaid invoice sit, the less likely it is that your client will pay it. Follow up with the client the day after payment was due if you haven’t received it. It could be that the check is in the mail or that your client had mixed signals and thought he or she paid the bill.

It’s a good idea to try multiple methods to get in touch with a client who’s behind on payments. If you’ve been communicating or sending invoices via email, a quick phone call can confirm that your client received the invoices and whether or not they have plans to pay them. It’s all too easy for a client who’s been ignoring emails about payments to continue to ignore your emails. A phone call reminder is more direct than email or a mailed letter.

8. Work with Clients Who Are Struggling to Pay

You might need to make a special arrangement with a client who is late on a bill. It could be that his or her own business is struggling and having difficulty with cash flow. What solutions you offer a client who’s late on an invoice depends on your overall relationship with his or her company and the reputation of that company.

For example, if this is the first time the client has been late, you might consider letting him or her pay in installments. The client can pay half of the invoice now and deliver the remaining half, plus a 10 percent late fee, by the end of the next month. You might not see the other half of the payment or the late fee, but if a client’s business is going under, getting half of what you’re owed now is better than receiving nothing later.

9. Handling Clients Who Frequently Pay Late

A client who’s hit a rough patch and has trouble paying one time is one story. But what about clients who are always late? Depending on how frequently a client pays late or how late he or she pays, it might be in the best interests of your business to part ways with the client.

Think of the extra effort your business has to put into tracking down chronic late payers. Either you have to make the calls yourself, or an employee does. In either case, that’s valuable time spent you could have used doing something else for the good of your business.

Plus, every time you work with a late-paying client, you are taking a risk. That client might pay late again, disrupting your business’ cash flow and making it difficult for you to complete other projects. Or worse, that client might not pay at all.

If you do decide to continue to work with late-payers, the best course of action to take is to have them pay in full, upfront at the start of a project. Don’t have anyone on your team begin work until the client’s money has cleared the bank.

10. Don’t Move to Collections First

Collections should be a last resort, not the first step in the process. While collections agencies can be very useful in helping you get paid when all other attempts have failed, they should not be your first option.

Reporting your clients to collection agencies, even in cases where they have not paid, can damage your relationship. If you have a long-standing client and send them to a collection agency, they may not return to your business again.

Another consideration is that collection agencies do charge a significant fee, often in percentage points of double digits, based on the amount owed. You may be charged fees and need to pay them even if the money is not collected. This may mean you don’t get paid but are out even more money. If a collection agency is successful in recovering the money, you may only get a fraction of what you are owed since collections will sometimes take a large portion of what is recovered.

In some cases, of course, there is little recourse but to go to collections, but when you improve accounts receivable, collection and agencies become the last resort. If you are noticing many instances of non-payment and late payment, you may wish to reconsider your contracts and your payment system to discourage late payments.

11. Get It in Writing

You may use customer relationship management systems to keep track of clients and their payments to weed out non-paying and late-paying clients. You may also wish to check client credit histories to evaluate your risk before you start work. Keeping records can help you avoid outstanding balances.

You can help prevent some late payments and non-payments before services even begin. Take a close look at your contracts and create written agreements that clearly outline the payment terms, timelines and deliverables. When clients know what is expected and when it may be easier to get paid on time.

One of the accounts receivable best practices many companies use is to have different contracts for different clients. If you do decide to work with a client with a bad credit history, you can draft a contract with amended payment terms. You may wish to ask for more upfront or may demand payment ahead of delivery to reduce the risk of non-payment. You may wish to create specific deadlines for payment or penalties for late payments as well as limits on balances outstanding. Another option is to reserve the right to not deliver specific services until a balance is paid.

Having everything written down and signed gives you more leverage if an account does go to collections. It also gives you more negotiating power when an account first goes into arrears, since you can point to the agreement you have both signed.

12.Incentivize Early Payments

While it’s in your company’s best interests to speed up the collection of accounts receivables, it’s often in the best interests of the companies you work with to put off paying invoices until the due date. Delaying their accounts payable for as long as possible might be one way a company manages its cash flow.

For that reason, one of the more useful accounts receivable management techniques is to give your clients a reason to pay their invoices early. You might offer a small discount to clients if they pay their invoice within 10 or 15 days of receipt, for example.

Another option is to add late fees. Late fees won’t necessarily get your clients to pay early, but they will discourage late payments. For example, you might tack on a late fee of 2 percent if the invoice isn’t paid within 15 days after the due date. After that, the late fee might jump to 5 percent if the invoice remains unpaid.

Automating your business` accounts receivable systems is one way to improve AR collection. 

13. Automate Your Accounts Receivable Systems

Tracking down late-paying clients, sending reminders to clients who might be about to miss a due date and working out payment plans with delinquent customers puts a strain on your business. You end up dedicating time to tasks that would be better spent on projects or on building the business.

Automating your business’ accounts receivable systems is one way to improve AR collections. The AR automation process starts when an invoice is created. The invoice is then emailed to the client so they receive it instantly. If the client pays by the due date, no further work is needed.

But if the client misses the due date, the AR system will send notices to the customer, letting him or her know about the missed payment. After a few days, the unpaid invoice gets sent to a clerk, who follows up with the client by phone. The invoice continues to escalate, if not paid until it is a month past due. At that point, the AR system can move the invoice to collections, holds or calls.

During all this, you are aware of what’s going on and can cease work on further projects with the client if you wish. But you aren’t required to handle the details of contacting the client or arranging for payments.

To learn more about MHC and our automation software, schedule a free demonstration today.


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