(or anywhere, if you can do it well in China)
In a previous article, I told the story of how I successfully collected a 400k bad debt in China. Link.
Here, I’d like to share more about how to build a robust process, to maximize the chance of collection, and to reduce time wasted in chasing payment.
Who is blocking payment?
Most people in your customer organization are just salary employees who want to do their jobs, and then go home to their kids. They might have their KPIs to chase, but they shouldn’t have any reason to give you a hard time by delaying payment.In most situations, the person who uses your service isn’t gonna be the one who will actually process the payment for you. This is a crucial point. We need a way to tackle two different group of people: the end user (your friend – hopefully your product or service has made their jobs easier, as promised), and the accounts payable (“A/P”) people.
The AP people are not really your enemy, but unfortunately sometimes they can become unreasonable because they have a KPI called “Creditors Day” to achieve. Or they may not even have it. They just imagine that a long creditors day will make them look good. They want to maximize that, so inevitable, they always will want to pay you later then sooner. (That is not the case in Japan. Another article for that.)
Do your customers understand the payment terms?
To ensure smooth collection, first, you must have a well written service agreement. It has to lay out very clearly what constitutes completion of delivery. In the case of an executive search service agreement, we defined it as the event of the candidate reporting to work. In the case of a software sales, it would be when the piece of software is downloaded by the customer.
In any case, it has to be a well-defined event. From the time of the event, customer will have whatever number of days to process payment, say 14 days or 30 days.
It is important that every salesperson in your organization takes the trouble to explain, and to get your customer to understand and agree to the above “obvious” terms. If you have provided a good service, and your end-user customer understood the payment terms, they should be on your side when you need to deal with those nasty A/P people. (Those that are nasty. I have met really good ones.)
Late Payment Penalty
Make sure you have this clause in your contract. It can be 3%, 1%, 0.1%, doesn’t matter. You just need to have it.
Some customers will say, no, we cannot accept any late payment penalty. I would then ask, “Why, is 14 days not enough to process payment? Then let’s make it 30 days. Or 60 days. Or 6 months. (Yes, I know a very large company in China that typically takes 6 months to pay.)
Think about it this way. In most countries, interest rate is so low that I’d rather collect later, then to waste my people’s time chasing payment.
And some customers will say, “No, we will just pay whenever we please. We simply will not commit to any payment time frame.” Then you’d ask yourself whether you want to work with unreasonable people like this. If this company cannot commit to pay you, everything else can go wrong. I’d rather use my energy to go find another customer.
Automate Payment Notice and Reminders
I have had sales guys telling me that it was impolite for our accounting department to send overdue reminders to customers. They would prefer to use late payment incidents as an excuse to talk to customers. You can imagine how I think about this kind of salespeople.
I remember one incident quite vividly. Our sales guy called the customer repeatedly, but they just wouldn’t pay. Then we sent an invoice of the overdue interest. The customer then called me, and told me that we were rude to chase payment. I offer that if she pays within 7 days, we would waive the overdue penalty. But if they don’t, overdue penalty will continue to accrued.
We saw the money in our bank three days later.
The reason is clear. Some people are just so addicted to power, and will use it to bully innocent people. But he knows that when his CFO gets a letter from us demanding overdue interest (with valid contractual backing), he’d know he had no answer to explain why his company should pay interest for no reason.
Legal action to collect payment actually does work in China, and is not that difficult. See my other article .
Leroy Yue is a cross-border business advisor based in Hong Kong. He speaks fluent Chinese and Japanese. He graduated with an MBA from London Business School.