When B2B customers don’t pay: 7 tips for preventing nonpayment

 In Accounts Receivable Factoring, Business Services, Finance Highlight

Nonpayment affects every business, but for small to mid-sized businesses (SMBs) who sell to other businesses, the stakes are especially high. Unlike enterprises, SMBs often have a smaller credit facility, smaller cash reserves, and less elasticity in their cash flow. As a result, a single unpaid invoice can deal a significant blow to the organization’s financial stability. 

The reality is that the majority of SMBs are likely to experience nonpayment. Research by Atradius found that 47% of all B2B invoices (invoices issued by businesses that sell products and services to other businesses) issued in the U.S. were paid late, and 6% were written off completely, resulting in a loss of hundreds of millions in revenue. 

As the Executive Vice President of Operations Management for AR Funding, an invoice factoring company, Kevin Gilbert ensures that AR Funding’s factoring clients receive prompt payment for the invoices they submit. In his experience, payment issues are all too common. 

“Customers don’t pay attention to the payment terms, or don’t think the terms apply to them,” he said. “They may also take credits and discounts that have not been agreed to or authorized by the business, or insist that the goods and services they ordered were not delivered in full.”

These scenarios can result in late payments, partial payments, or, in the worst cases, nonpayment. Gilbert said a big part of the problem is that businesses forget that their customers are also account debtors who receive the business’s goods and services on credit. When that credit facility isn’t managed carefully, payment can become problematic.

He recommends these seven tips to help businesses smooth the payment cycle and protect their revenues.

1. Practice good credit management

Nonpayment issues arise from misunderstandings and inefficiencies more often than financial hardship, but it’s always a good idea to evaluate a customer’s creditworthiness before deciding on the amount of credit to extend them and the payment terms involved. Remember, you are essentially lending that customer money every time you sell them goods and services. You can learn more about how to make better decisions around customer credit by reading this blog post

2. Improve invoice quality

Frictionless payment processes begin with well-crafted invoices. By providing as much information as possible up front, you can reduce confusion and delays when it’s time for payment. Each invoice should include:

  • A unique identification number
  • Your company name, address, and contact information
  • A description of the products and services that require payment
  • The per-unit amount (cost per product or hourly rate for services) 
  • The date those products or services were rendered
  • The total amount owed
  • The terms and methods of payment, including penalties and discounts

Each invoice should also be accompanied by supporting documentation, such as a purchase order, delivery ticket, bill of lading, time-sheet, rental agreement, or contract.

3. Document the purchase and delivery

Every sale should be documented with a purchase order or a contract agreement from the customer, and the delivery of goods and services should also be documented.  

“A lot of companies will say, ‘We never got that,'” said Gilbert. “They’re not dishonest. They’re just disorganized. Collecting a proof of delivery from the shipping company will head off those statements and expedite payment.” 

He said that for staffing companies, disputes over hourly charges were especially common. These types of businesses need to be sure that the service contract includes the rate per hour and any additional charges applied for overtime or staffing outside regular business hours.

4. Ask for a standby letter of credit

If a customer requests goods and services that amount to more credit than the business is comfortable extending, asking for a standby letter of credit from the customer’s bank can give the vendor peace of mind. This type of letter promises that if the customer is unable to pay for any reason, their bank will accept the responsibility for the debt and issue a payment on their behalf.  

5. Consider credit insurance

AR Funding uses credit insurance to protect itself and its clients from the risk of nonpayment. In situations where a customer fails to pay an invoice because of insolvency or other financial issues, credit insurance protects the business by paying a percentage of the amount owed. 

While this type of insurance adds to the cost of the transaction, Gilbert said that it can be a wise option for some businesses, particularly when they extend generous credit facilities and payment terms to customers, or have a high percentage of their business tied up with a single customer.

6. Conduct diligent follow-up

Many businesses feel as though sending their customers payment reminders is offensive, but it’s actually a courtesy. It’s easy for things to get lost in the shuffle: by checking in with customers and ensuring they have everything they need to process the invoice efficiently, the vendor can make life easier for their customers while ensuring prompt payment. At a minimum, call the customer within 30 days of sending the invoice to make sure they received it and see whether they have any questions, and call them again no later than 10 days after the invoice is due. Get more tactics for issuing respectful, helpful customer payment reminders in this blog post

“It’s easier to clear up an invoice issue at 30 days than it is at 75 days,” Gilbert observed. “The longer you wait to fix the issue, the less likely you are to get paid. By doing your due diligence, you can make sure that invoice is getting where it needs to go to be keyed and approved for payment.”

7. Have a written dispute resolution policy

In rare cases, vendors may need to take legal action to collect on an invoice. Hopefully, it’s a last resort you never have to take, but it’s still a good idea to include a dispute resolution policy in your customer contracts that outlines the rules of legal engagement. The two most important stipulations to include are:

  1. Any legal action will take place in the jurisdiction in which your business is located. Otherwise, you would need to pay travel costs to get to the customer’s preferred location. 
  2. Legal costs will be awarded to you if you are successful in your legal action. This prevents a situation where even if you win the legal battle, you’re left on the hook for costly legal fees. 

Protect your hard-earned revenues

No matter what size your company is or which sector you serve, you are likely to face the issue of nonpayment, partial payment, or delayed payment more than once. In some cases, losing out on expected revenue can be devastating to your ability to meet your own financial commitments or even to continue operating. 

Gilbert said that while different industries had different rates of nonpayment, he recommended that every business aim for 100% payment and accept no more than a 5% dilution of their earnings caused by payment issues. 

“If you don’t stay on top of the process at every step, you increase the chances of nonpayment,” he said. “An effective collections process begins before the sale is even made, and it continues until the invoice has been paid on time and in full”

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