This procedure can actually encourage delayed payment: Other options are more effective for steady, consistent cash flow from receivables.


Naturally, every company strives for a steady flow of cash receivables. In order to ensure this happens, most will often resort to the dreaded "automatic credit hold process" to receive payments in a timely fashion. Problem is, this generally makes matters worse.

As the chart below illustrates, research has shown that when a credit hold mechanism is the pressure point for customers to pay, payment dates tend to drift out toward that pressure point. Since most credit hold triggers are reactive (such as 30 days past due), payments tend to be delayed even more.

Credit Holds

Credit holds are effective as a tool to minimize risk and bad debt and as an incentive for customers to pay, provided they need product, but rarely are credit holds effective at maximizing cash.

Unfortunately, far too many credit departments use credit holds as the driver of their day-to-day workloads and thus are missing out on opportunities to maximize cash.

The decision to place a credit hold is generally reactive and designed to only minimize risk and bad debt, rather than designed to achieve strategic working capital goals.

Now while a credit hold can be a valuable tool, it should by no means be used as the driving strategy for generating the maximum amount of cash from your receivables month after month. Credit holds can also create unnecessary strains with good paying customers, as holds triggered on these types of accounts are generally due to a problem with a product or service, a problem with the invoice, such as pricing, freight or sales tax or lack of adequate information to pay (such as a missing invoice copy or a proof of delivery).

Customers with the need or desire to pay slowly learn to rely on the reactive criteria as a means to delay payment. Customers learn that "they'll put me on credit hold when I get too far behind, that's when I'll make my payment."

So in essence, credit holds train customers to pay slowly!

So What's The Solution?

A thoughtful, customer-centric approach is necessary to subtly encourage slow paying customers in order to enhance their payment schedule. This has been proven to enhance customer satisfaction by providing continuity and building trust -- thus, shortening payment windows.

In today's economic climate, an increasing amount of customers are bound to pay slower than normal. Which is also why you need to pay close attention to the specific needs of these partners, engaging them in order to establish a more orderly and consistent receivables schedule.

With this new approach, you will begin to realize increased working capital on a steady basis, allowing you to spend your valuable time actually growing your business rather than chasing old business!