By Dean Kaplan, The Kaplan Group
Many SaaS companies operate with limited working capital or cash-in-hand. This can cause cash flow problems, especially in the early years of business. The cash flow trough is especially pronounced for SaaS businesses because of the need to spend so much capital on development and marketing early in the life of the business. When you are already walking a fine line with expenses, lack of payments from customers can quickly make matters a lot worse. These four tactics will help solve many of the payment issues that SaaS companies face.
Practice Best Practices
There are a number of best practices for taking on new clients no matter what type of business you’re in. These include having clear terms in your contract that spell out what acceptable service is, limits to your liability, when payments are due, and consequences of default. Late fees, monthly finance charges, customer liability for collection costs and attorney fees, and acceleration of all future fees to be due immediately are a few ways to protect your company and leverage when pursuing delinquent customers.
It’s important that you have written policy and procedures that you follow in the event of default. Many SaaS clients do not investigate the credit worthiness of potential clients, thinking that their high gross margin means it doesn’t matter if they default. But when cash is tight, you want limited resources focused on customers who can and will pay. Some basic due diligence makes sense before the sales team secures a customer and the onboarding process starts. This is even more important for SaaS vendors that have higher start-up costs for each new client and don’t turn a profit until later in the contract period. Run a credit report or do some quick internet research to confirm the entity’s existence and exact legal name, a validated address (not a PO box), and their online reputation with customers and vendors.
Switch To Annual Payments
Many SaaS contracts are month-to-month or annual contracts with monthly payments. While it makes sense that clients (especially those with their own cash flow issues) would prefer this arrangement, it can cause huge headaches for you and is a missed opportunity to have your clients finance your business. It costs time and money to process payments on a monthly basis, and if a customer’s credit card is declined, you can spend considerable effort chasing down a replacement. If they no longer want the service, then there is a good chance they won’t pay unless you send them to collections or sue. Raising money from investors or banks can be expensive, so if necessary, give clients a financial incentive to pay for the entire year in advance.
Create Clear Auto-Renewal Provisions
Contract auto-renewal makes sense for your customers. If their business relies on your service, they don’t want service interruptions. It also makes sense for you; auto-renewal keeps the money flowing in to your business without interruption and means you don’t have to invest time and resources into getting customers to re-up. It’s important to require a 30 to 90-day advance notice of contract termination so you have early knowledge about future cancellations and the impact on your cash flow. Auto-renewal provisions are enforceable in court. It’s possible to get sizable settlements, without litigation, for clients who had customers cancel after the contract auto-renewed.
Act Quickly In The Event Of Default
If a credit card auto-payment doesn’t go through, take immediate and consistent action. The customer is still using your service while not paying, a double hit to your cash flow. When email doesn’t work: call them, find a responsible party, and follow up regularly until the issue is resolved. If they are not on auto-pay, notify customers in advance of payments due. Follow up the day after they are delinquent. If you don’t follow up immediately and consistently, your customers will learn they don’t have to pay you on time. Escalate quickly if you aren’t making progress. Industry statistics show that once an invoice is 90 days past due there is a 25 percent chance it will never get collected. The collectability rate continues to decline rapidly the longer it remains unpaid. Collection agencies typically work on a contingency basis and some also will focus on customer retention, so don’t hesitate to escalate promptly to increase the likelihood of collecting.
SaaS is a unique business model, but many of the collection problems are the same as with other businesses. The best way to improve cash flow is provide excellent service, have comprehensive documentation with your customers, know your customers and their credit-worthiness, and take prompt and professional action when problems arise.
About The Author
Dean Kaplan, President of The Kaplan Group, has 35 years of business leadership, training, and consultation to many industries including software companies.