Collecting accounts receivables promptly is essential for a healthy business cash flow. But how do you properly deal with non-paying (and subsequently unresponsive) clients? What’s the best way to manage credit collections for unpaid invoices?
Picture this scenario: You are in a recurring buyer-seller relationship with a certain Client A. They’ve chosen you as the supplier of a crucial component of their flagship product. Every month, Client A sends you a 50% down payment for the products. Upon receipt of the down payment, you promptly begin to manufacture and then deliver the requested supplies on time. Upon receipt of the products they ordered, Client A sends you the rest of the payment, and the cycle continues.
However, on the ninth month of the relationship, Client A fails to remit the rest of the payment. You wait another month. Unfortunately, Client A goes from apologetic to uncommunicative.
Going forward, there are a few ways to go about this.
1. Send a demand-for-payment letter.
Send a demand letter first. Typically, a demand letter is certified by your attorney and mailed to the client. In this letter, you give your client payment options on how best to settle their financial obligation, such as letting them pay in installments. The language you use can go from pleasant to mildly threatening, whichever you or your lawyer prefers. But the principal message is the same: Pay up or face “legal consequences.”
A caveat: The thing about demand letters is they tend to get ignored and usually do not lead to the results you want, which is to collect long-overdue payments. What demand letters can certainly do is allow you to set a timeline for your non-paying client to respond. If they fail to act on your request beyond the prescribed timeline, you and your counsel can then formally launch the next step, which is more expensive and headache-inducing: going to court.
2. Hire a lawyer
When going this route, the message you send is decidedly more serious and threatening, as is generally the case in situations involving lawyers.
Now that you’ve taken out the big guns, you can perhaps imagine what this can do for your bottom line. Lawyers don’t come cheap, so this means that whatever amount your non-paying client owes you, it must be substantial enough to get a lawyer to help with the credit collections.
Once you involve a lawyer, the defaulting client may realize that the incoming costs and hassle are not worth it from a practical point of view and may be forced to settle. At least, that’s the scenario you can hope for.
3. Hire a collections agency
When you hire a collections agency, you face a couple of options:
- One, the agency buys the debt amount from you, usually at a very low price. Going back to the example of Client A, let’s say the unpaid invoice amounts to $45,000. The collections agency then assumes Client A’s credit balance and buys the debt from you at a price as low as $15,000. If they manage to successfully negotiate and push Client A to pay up, the collections agency gets the rest of the amount. The upside to this setup is at least you get payment for a fraction of the amount owed. The downside? Well, you only get paid a fraction of the invoiced amount.
- The second option is to allot a percentage of the collected amount as payment to your agency. Say, you and the agency agree on a 35/65 split. So if Client A agrees to pay $30,000 out of the $45,000, the hiring agency gets 35% or $10,500, and you get 65% or $19,500. $19,500 may look like a sad figure compared to the original $45,000 you were supposed to get, but options can be stark in situations like these.
If you want to recoup a little bit more, you can wait for a court judgment or an arbitration award in your favor. Collection agencies will pay more to collect debts with court backing.
How credit management software can help
Credit management platforms allow business owners to extend credit to their clients, increasing the range of payment options for B2B buyers without the seller worrying about tied-up capital or the often frustrating world of accounts receivable management.
One example, Apruve, lets sellers extend credit to their business buyers, but sellers still get paid immediately (usually within 24 hours) through a revolving line of credit. With mutually beneficial payment options, it’s less likely for your client to shun friendlier installment terms, which is also a plus for your business. With such convenient terms between buyer and seller, you might not even need to hire a collections agency at all.
As a business owner, you want the most cost-effective means of ensuring your accounts receivables are collected on time. Lawyers and collections agencies are always ready to back you up when push comes to shove, but where there’s a way to negotiate better payment terms, credit management software can prove more useful.