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Jeudi 4 Mars 2021

What happens if your customers cannot pay?


From time to time, businesses and individuals can find themselves in financial difficulty. It may be that there is a slump in the market or that a business expanded too quickly. Whatever the reason is the fact remains that if you are the creditor then it can impact your own business and slow your cash flow down.



When your cash flow is affected it can cause delays in paying your own suppliers or even halt daily operations if it is a serious amount of money owing. If you have late or non-paying customers then you will need to find ways to get paid and to prevent it from happening again in the future.

What can you do if a customer doesn’t pay?

If someone is refusing to pay or dodging your payment requests then it is easy to imagine that you can just send in a debt collection agency to frighten them into paying up. However, there are many preferable and more productive techniques that you can try first.

Invoicing and contracts

Once the goods are shipped they should be accompanied by a clearly written and accurate invoice. This is step one to receiving payment on time. The invoice should state the amount owing and for what goods or services plus the date you expect payment.

Terms and conditions should have been agreed upon before the sale was made and if there are any penalties or clauses then they should have been made clear too.

All being well a customer will receive their goods and then pay on time. However, this doesn’t always happen so you will need to follow your invoice and open up channels of communication.

Communicate professionally with your debtor

The first thing you want to do is talk with your client/customer. There is no need to bang down the doors just yet. Quite often a simple telephone call may be enough to give a gentle but firm reminder that payment is overdue. Calling a customer is a very personal way to communicate and keeps things on a friendly basis.

Next, you can send an overdue invoice letter to push things on a bit towards, hopefully, payment. Sending a professional-looking document that is addressed personally still keeps things friendly but means you are following the correct channels. You can of course mail this the traditional way but email is much more preferable. The benefits of email are that you can prove it was sent and delivered, it is instant, and it is free. If you are still having difficulties with receiving payment then there are some more options to consider.

Software

Not receiving payments can be more than just a little convenient. It can disrupt the flow of daily operations and leave your company with little in the way of liquid assets. Chasing a debtor also means that you will waste the time that could have been used more productively with your business.

Outsourcing of debt management is one way to alleviate the problems of chasing up customer debt. Some professionals specialize in managing this type of debt and will send out invoices and communications on your behalf allowing you to concentrate on more productive areas. Then there is also software to consider.

You can use debtor management software to help manage your customer debt and free up time for yourself. This software sends invoices and overdue letters automatically to any of your debtors when payment is due. The benefits of this type of software are that it allows instant payment through direct debit or PayPal, lets the debtor communicate with you directly through the platform, and can free up possibly 50% of the time you waste on debt management.

Payment plans

One way to encourage a customer to pay is to arrange a mutually beneficial payment plan. This simply means that you set an amount to be paid back each week or month by your debtor until full payment has been made. You may or may not include interest on top of the outstanding amount and can also include penalties for missing payments and alternatively incentives to encourage early completion of the debt.

Penalties and incentives for making payments

As part of your original terms and conditions for payment, you can encourage early payment and likewise, discourage a customer from paying late by including some clauses.

If a customer pays within a certain time-frame, perhaps a week or 10 days you could offer a discount on the amount outstanding. Alternatively, if they are late you can impose financial penalties by adding interest each day after 30 days have gone by with no payment. These terms should be made very clear at the time of signing any contracts and stated clearly on any documentation sent to the customer.

Using factoring to receive payment

If you are having problems receiving payment then you can consider using factoring to bring some cash into your business quickly. Essentially if you use this option you will be transferring ownership of a customer’s debt to another organization that will purchase it from you.

The biggest benefit is that you will receive your payment very quickly and will no longer have to worry about the debt. The biggest disadvantage is that you will not receive the full amount owing and could conceivably lose a large percentage of it.

How much cash you get from any accounts receivable through factoring will depend on the buyer/factor you use and also how much of a risk they view the debt as being. If they feel that there is a lower chance of making the debtor pay then their offer to you will be smaller. The amount received by you from a factor could typically be around 80% of the total amount due.

Using lawyers and debt collection

Using a lawyer to communicate with a debtor and be on your side should you move towards litigation can often be enough for a customer to suddenly find the money owing. If you use a lawyer then it shows you mean business, however, litigation is not always the way to go and could cost more than the debt outstanding. In some countries, there are small court claims that can be made online for lower amounts and this can encourage a debtor to pay before it ever reaches court. It also removes the need to hire a lawyer.

Debt collection agencies are often seen as the last resort. In the past, they might have been seen as violent and not the best approach but today agencies are licensed and professional businesses.

If all your other options have failed then it might be time to bring in one of these agencies. Sometimes a firm will purchase your debt (much like factoring) and others will purely be employed by you to chase what is owed. You will need to verify if a debt collector is legitimate as they will be representing your company in a manner. If they behave badly or in an unprofessional, or even illegal way then this will reflect on you. In some regions and countries, you may even be legally responsible for their actions if you are employing their services.

Summary

There are ways to improve the time it takes for a business to get paid and sometimes it might be as simple as adding more payment options or taking deposits up-front to reduce the chance of debt. Communication with your customers is vital and having debt management software to automate invoices and allow payment portals are just one way to make life easier for you and your debtor.

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