Why payment defaults can be dangerous for companies
Business-to-business (B2B) transactions are complicated. If you sell products and services, you should pay close attention to the solvency of your buyers.
The invoice amount includes a proportion of your operating costs, for which you have already paid in advance. The margin is your company's profit, which you cannot do without. If the money is not received, you lack liquid assets that you urgently need for reinvestment. If several payment defaults occur together, you will only have an additional cash injection to tide you over. That's why the media repeatedly report on healthy, profitable businesses that come under pressure from corporate customers because of poor payment practices and liquidity problems.
Definition: When do we speak of payment default?
Experts distinguish between the terms payment disruption and non-payment. If a buyer fails to settle an invoice after the payment deadline has expired, this is legally considered a payment disruption. This does not then mean that the money will never be received. At this point, a company still has the prospect of using dunning procedures to obtain the outstanding amount. Non-payment refers to the situation when it is clear you will have to write off the invoice amount. Reminders, collection procedures, and legal action have all failed to help. Your corporate customer is on the verge of or already in the middle of insolvency. In common parlance, we often use the terms congruently.
Tips and tricks to avoid payment defaults
Successfully managing non-payment risk rests on three important pillars:
You decide for yourself which building blocks from these areas best suit your company, your industry, and your customer clientele.
Reducing the risk of non-payment - first steps when default is imminent.
Dunning process: Does your company take care of defaulting payers in-house? Then it is necessary to organize the dunning process in a streamlined and legal manner. Send out payment reminders and dunning letters promptly. Then you have a higher chance that the recipients will take you seriously. This also has a psychological effect: If they had simply forgotten about the invoice, they are more likely to remember to pay on time in the future.
Out-of-court settlement: In some cases, a dispute arises between the supplier and the buyer: regarding the invoice amount, product, agreement reached, or similar. The buyer withholds payment in whole or in part and is unwilling to relent. Then you can use the option of dispute resolution or go to arbitration. You avoid expensive court proceedings if both parties reach a settlement.
Collection procedure: The collection procedure offers a certain degree of protection against defaults. In this case, you commission a collection agency to professionally collect your receivables. You decide at what point in the dunning process the collection agency goes into action. You also have the option of selling your receivable to an agency. If you do this, you will receive a portion of the outstanding amount minus the fee, and the collection agency continues the dunning process in its own name.
Legal proceedings: This is when all reminders are in vain, and your buyer does not pay. As a last resort, you have to go to court to enforce the claim and get at least part of the amount.
Measures you use to protect against failure
Risk assessment: Before an order is placed, a company conducts a credit check. This involves solvency, company form, correct address, and previous payment history. You take the information from your own existing data, among other things. In addition, credit agencies such as SCHUFA, chambers of commerce and registers, as well as local courts and debtor directories provide information.
Save your own information: Another tip from the field is to supplement data about customers with their payment information. Save when you need to remind customers about payments. When you learn of liquidity problems or the bank returns direct debits. Based on this data, set purchase limits and restrict payment methods. Once signs of problems accumulate, stop doing business with a customer.
Secure legal requirements: Every merchant knows that there can be no sale without a contract. The contract is like insurance against non-payment because it avoids disputes and disagreements. That is why it is important to have legally correct terms and conditions. It makes sense to hire a lawyer to go over contracts and documents. The invoice must have all the necessary information and ideally already state a date for the payment deadline. Companies make sure that they accurately document all processes surrounding the order and the sale.
Payment defaults only occur when you give your corporate customers a payment term. Although invoice purchasing is popular in B2B, there are other alternatives. You can obtain fast liquidity with a high level of protection against default by using payment methods like prepayment, credit card, secured invoice purchase, and instant bank transfer. However, you also run a certain risk with these methods. If the online store does not offer payment by invoice, the abandonment rate increases and statistically customers add less to their shopping carts.
Insurance against non-payment? That's possible!
Retention of title: The goods remain your property until full payment. You have the right to reclaim the products in the case of non-payment. The advantage in case of insolvency: The goods do not become part of the insolvency estate.
Insurance of non-payment: Different insurances are available for companies. You can use them to purchase default protection as well as to cover the follow-up costs of dunning and court proceedings.
Factoring: With factoring, you sell your receivables to a financial services provider. The financial service provider handles the payment processing and, if necessary, the dunning process for you. There are different types of factoring. Billie focuses on full flexibility and full default protection. That's why you decide separately for each receivable whether you want to sell it. If you do, you reduce your risk of non-payment to zero.
Secured invoice purchase: The offer applies to online stores and includes a service package with automated credit checks and assumption of default risk. With secured invoice purchasing, you receive your money in a few days from the financial service provider, who takes care of payment processing and dunning.
Do you have your own online store for business customers and would like to implement purchase on account as a payment method? Or do you have questions about B2B payment methods and purchase on account? Then contact us at email@example.com or book an appointment here and we will get back to you. We look forward to hearing from you.