Finding, getting, and keeping customers is the challenge every business faces. Very few are lucky enough to have new prospects lining up at the door. However, how can you be sure that the customer, after all your hard work, will pay? What can you do to get a client to pay an invoice—and pay on time?

Suffering a non-payment event—whether it’s your first, the most recent, or the most significant—can feel overwhelming. Damage to companies caused by non-payment of invoices is never solved overnight. Restoring optimism and trust is an ongoing challenge.

Non-payments can actually add up and damage your company on multiple fronts. Even ignoring a relatively-small invoice can hurt your bottom line—especially if you depend on receiving a payment in time to pay expenses or if you rely disproportionately on a small number of clients, AKA “concentration risk.”

So what do you do when a customer doesn’t pay?
Knowing where to start is essential.

How to Avoid Non-Payments from the Start

After a few years of trading with a given customer, you may feel that the relationship is great and you can trust your customer, so these problems will not affect you. You may believe that because the organization is large, it will pay your invoice to protect its reputation. Perhaps the account has assured you that a budget is in place and there is no danger of nonpayment. Your sales team may have checked the credit history of the customer elsewhere and feels confident that the customer is financially robust. These indicators are all important, of course, but don’t be surprised if overdue payment still occurs.

In order to avoid non-payment from the start, it helps to understand a little more about how the event occurred in the first place. Begin by asking yourself the following questions:

  • Did you have systems in place to prevent loss or limit your exposure?
  • Did you get contracts signed?
  • Did you outline your deliverables and payment terms?

You can make non-payment less likely to happen by answering these questions and being proactive. You can then begin to mitigate your A/R risk by following cash flow management.

Getting a Client to Pay an Invoice after Nonpayment

It’s difficult when a customer misses a payment—especially when it’s one you have grown to trust. How can you convince them to make a payment? Start with these four steps below, and remember that nurturing the relationship with your customer is of the utmost importance. Fostering open communication with your customers can save you from hefty legal fees and court dates in the end.

1. Contact the customer

The first step is to make contact with the customer. Sometimes a phone call or resending the invoice is enough to secure payment. If this doesn’t work, explain the consequences of nonpayment for your particular business courteously—whether it’s discontinuing their service or reporting their delinquency to a credit-rating organization. Depending on the situation, you could also consider offering to accept the payment in installments to ensure that you can collect the debt and increase cash flow in the short term.

2. Assess interest or late fees on unpaid invoices

Because you extend credit to customers, you can charge late fees or interest when invoices go unpaid. But charging a late fee or interest can’t be added on without notice. It’s always best to have a late-fee policy in place and as part of the original agreement of sale. Include a reminder about the policy on every invoice. Doing so can be a good incentive to customers to pay you on time.

Once an invoice becomes past due, contact the customer by letter reiterating your late-fee or interest policy and provide a copy of the past-due invoice. In that letter, you may opt to offer a payment plan and the parameters around that in lieu of charging the fee. Those parameters should include the specific number of payments, amount of each payment and the payment schedule. In addition, with a payment plan in place for past-due money owed, it is wise to make all other sales to that client cash on delivery until the payment plan is completed and past-due monies are paid.

Cash flow problems can happen in any business. Be careful when – or if – you charge a late fee. If a good customer suddenly is unable to pay an invoice, it’s worthwhile to try to understand their position, collect what is owed via an agreed-upon payment plan and maintain a good relationship. Remember that in some instances, applying a late fee or interest the moment an invoice is past due can cause harm to the relationship and not only result in non-payment but also a lost customer.

3. Send a formal debt collection letter

There may be times when calling to remind a client about a past-due invoice or offering a payment plan in lieu of accruing interest or late fees gets no response. In those instances, it will be time to craft and send a formal debt collection letter.

The purpose of a business debt collection letter is two-fold: You want to collect money owed to you and you want to establish evidence that you used good protocol to contact the client about the past-due amount in the event you decide to take legal action. Always send debt collection letters by certified mail with return receipt. This will allow you to prove your letters were received.

Your first debt collection letter should include the details about the invoice and summarize your previous attempts to communicate with the client. This letter should also inform your client that the unpaid invoice will be referred to a collection agency after a specific date. If that letter receives no response within two weeks, you should send a final debt collection letter. It should summarize your previous attempts to communicate with the client and inform them that the debt will be referred to a collection agency or that legal action will be taken to repossess unpaid property.

4. Call a collection agency

Good: If you do not find success contacting the customer, you may consider calling a collection agency. This helps free up your staff’s time for other work and delegate responsibility to the agency. This may be the best solution for small payments, as you often won’t have to put up any money—the collection agency will just take a part of the recovered sum. For larger delinquent payments, filing a lawsuit may be warranted. Talk to your attorney about how to proceed in your state; you may not need representation for the proceedings, but it is a good idea to get legal advice before following a suit.

Better: Rather than hiring a debt collection agency, you may wish to consider trade credit insurance at this stage. This insurance solution provides protection against unpaid invoices. Additionally, when you protect your accounts receivable against loss with a new credit insurance policy with Allianz Trade, you can also place unlimited debt collection accounts, including those pre-dating your policy, at our standard customer rate of 15%. By leveraging the preferred collections rate with Allianz Trade, many of our customers collect their debt and gain future bad debt protection for the same amount or less than a traditional debt collection agency.  

5. Take legal action for nonpayment of invoices

If working with collections did not work, and unpaid invoices are still lingering, it is time to seek legal action. You have the choice between small claims court or civil court. Small claims court is less time, money, and is quick to resolve your issue within the same day. With civil court, you will need to hire a lawyer, and the case typically spans over a series of days—ultimately racking up in legal and court fees. Before deciding which venue to pursue, you should pursue legal advice.

6. Pay attention to your staff

In severe nonpayment events, your cash flow may be damaged, and employee morale may be impacted—especially if you have to introduce job cuts and other cost-saving measures to remain competitive. In these cases, it benefits you to foster open and honest two-way communication between employees and management about the situation: what is being done to resolve it and how it will be avoided moving forward. Maintain trust by making sure that payroll is satisfied and that employees have clear expectations about when they will receive their checks. If you have to get a bridge loan or pursue financing to ensure these payments, do so. If your employees stop trusting you, you could end up facing even bigger issues, like poor engagement, employee turnover, and loss of reputation.

Evaluate Other Options After an Invoice Nonpayment

A well-designed sales process should be tracking and monitoring customer performance and standing in the market, but that can be difficult when time is short and there is limited information available.

Alternatively, you might be selling to many small businesses and run out of time to check their credit score, especially at the month-end when the pressure is on to meet sales targets. Eventually, you are likely to have a client who refuses to pay an invoice, or delays the payment.

That’s where credit management discipline is vital. Whether you have a dedicated team, rely on sales, or do it yourself, putting in place the tools and processes to track customer credit will build confidence that today’s sales will bring profits tomorrow. Confidence that can be shared with your lender, finance company, and investors.

Standardize Business Practices

After you have been burned by an invoice nonpayment event, start the rebuilding process by establishing a predictable standard for your core A/R business practices.

Every time you work with a customer, create a contract, write out the timeline, and spell out the consequences of late payment.

If you have not already done so, consider hiring an attorney to draft your company’s standard terms and conditions. These conditions should specify the customer’s agreement to cover all costs related to debt collection—including but not limited to third-party collection expenses, late fees, and legal fees. As part of your standardized process going forward, require customers to agree to these terms when applying for credit terms with your company.

 

Implement New Policies

If nonpayment has been a real issue for your company, you may also want to institute new policies to protect yourself.

Establishing a clear, signed agreement is key for an option like this. While these options insulate you from some or all of the receivables risk, keep in mind that they may also affect your competitive edge. If your competitors offer open terms and you require cash terms, you may lose business.

Monitor Credit Carefully

Your credit team’s primary responsibility is to check and monitor the creditworthiness of your prospective and existing customers. Creditworthiness is fluid, so this is not a “one-and-done” task. Rather, you should implement a defined system of monitoring for changes in financial health, particularly warning signs of distress. This process should be informed of the relative credit and trade risk of customers, with more frequent checks for newer, smaller and less-stable companies.

Also, officially document your credit policies and procedures to define how creditworthiness is determined and monitored. This document should specify data sources including (but not limited to) bank and trade references, credit reports, individual company financial statements, and ongoing monitoring of political risk and macroeconomic risk.

Prudent credit management is a tough and never-ending job; you may want to consider augmenting your internal staff by partnering with capable experts to ensure efficiency and thoroughness.

Protect Your Company with Trade Credit Insurance

The most powerful tool in the credit management kit is trade credit insurance. It is the “backstop” that will ensure you receive payment. This product is designed for those times when you’re let down by the most reliable account, or the organization with the best reputation, or your longest standing customer.

A trade credit insurance policy with a world-leading carrier is more like a partnership with a worldwide network of risk management experts. The carrier provides data and insights to help you pick the right customers to do business with, monitors their financial health throughout the year, and reimburses you in the event a covered customer fails to pay.

Find out more about how trade credit insurance works and how Allianz Trade can help you gain confidence for tomorrow.

Regain Your Peace-of-Mind

It is not easy to bounce back from the disruption that can be caused by an unexpected nonpayment event, especially if there is significant operational and morale damage left in its wake. However, remember that you survived it in the end, and are now able to treat it as a wakeup call.

Take steps to better prepare your company for these events in the future. As you start to take on the challenge, setting up predictable policies and procedures that incorporate industry best practices can be step one. As a powerful step two, consider engaging with a credit insurer like Allianz Trade who can provide guidance and information on risk management. This kind of relationship helps you make sure the next nonpayment does not affect your company’s solvency.

Even companies who have never been burned by a significant loss may find they are limiting their growth potential by being overly conservative with their credit risks. Companies who have been stung by nonpayment magnify this tendency. The investment in a credit insurance policy can often pay for itself multiple times over—even if a claim is never filed, simply by fueling safe, but aggressive sales in the future.

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Allianz Trade is the worldwide leader of credit insurer in trade credit insurance and offers expert solutions such as accounts receivable insurance, business debt collection, bad debt, trade credit, trade credit management, cash flow management, xol, debtor insurance, collect overdue payments, late payments and unpaid invoices. Our mission is to help customers globally to avoid trade risk, trade wisely and develop their business safely.
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