The moment a business customer submits a credit application for a purchase is the beginning of an important relationship. This process comes with the understanding that each party will contribute to a shared goal of financial success and satisfaction. The relationship needs to be protected and nurtured, but situations can arise that threaten the relationship — namely, when a customer fails to keep up their side of the financial obligation. Often there’s a legitimate reason for the default, but cash flow is crucial for the success of a business and the collections process can become a sensitive component that can disrupt or break the relationship. A credit professional must take the right approach if the relationship is to survive and thrive. It is often a delicate balancing act.
Reasons for late payments
When a valued customer is late paying an invoice, it’s important to first understand why the customer is falling behind. It might be due to cash flow problems, which has become common these days with the impacts of COVID-19. In this case, it might be wise to delve deeper and try to work with the customer on new payment terms and adjustments.
If the late payment is because of an incorrect invoice, it’s important to correct any mistakes and resubmit the invoice. If the reason is a faulty product or poor service, find out the problem, confirm if the product or service was inferior, then exchange the product or provide a refund. If there is a dispute over repayment terms, you’ll have to find copies of the receipt and any supporting documents to prove your case.
To reduce the chances of default, the best course of action is to be proactive. Avoid waiting until the bill is overdue. Send a payment reminder or phone the customer when the due date is approaching. Also, look for signs that the customer might not pay on time. Has the customer been paying erratically? Are they making excuses or not returning your phone calls? Ask when you can expect payment and be firm when you explain that you expect payment by the date promised. It’s important to act quickly to increase your chances of recovering the money owed.
Best practices for preserving the customer relationship
Naturally, you need to protect your cash flow, but you want to do so in a manner that doesn’t threaten the relationship with your customers. No one likes to be put under pressure, and if a supplier or the Accounts Receivable manager pressures a customer, there will likely be a clash. Here are some best practices for successfully handling late-paying customers:
- Avoid excess pressure or threats of legal action.
- Don’t be argumentative or raise your voice; keep emotions out of it.
- Ensure the invoice is correct and keep a copy of receipts.
- When a customer misses a payment, immediately send an unpaid invoices letter. The letter should contain information about both companies; the primary contact person for each company; the invoice number and amount, plus interest or late fees; an explanation that the invoice is overdue; information about next actions; and consequences of non-payment.
One of the best ways to reduce conflict with customers is to use an intermediary to avoid dealing directly with the customer. This third-party collection agency has no emotional attachments and will listen to both sides and negotiate an amicable solution. If the customer is disputing the invoice, the agency will take that information to the company for resolution.