In any contractual agreement between a business and its business-to-business (B2B) customer, payment terms are established. Depending on the contract, these deadlines range from being due immediately upon receipt of the invoice to a set number of days after the date on an invoice. Despite these terms, 43% of U.S. B2B businesses report that their customers still fail to pay on time, which has a negative impact on a company’s cash flow.
“Late payments or extended payment terms can disrupt the financial stability of the business, impacting day-to-day operations and hindering growth,” said Paul Miller, Managing Partner and a Certified Public Accountant at Miller & Co. LLP.
[Read more: How to Set B2B Customer Payment Terms]
Why do B2B customers make late payments?
A B2B customer may make a late payment for countless reasons, spanning from financial hardship to dissatisfaction with the provided offerings to simply forgetting to pay. The B2B customer could also be closed, either temporarily or permanently.
Administrative errors can play a part, too, such as a lack of follow-up on outstanding invoices or miscommunications internally or externally. Additionally, outdated customer information or disorganized processes can lead to a business’s invoice failing to reach the customer. Plus, if a business didn't do its due diligence before offering a B2B customer credit, it could have been wrongly approved — as is now evidenced by the customer’s inability to pay.
“Reach out to the client promptly to understand the reason for the delay and discuss potential solutions. It might be a simple oversight or a financial constraint on their end.”
Paul Miller, Managing Partner, Certified Public Accountant, Miller & Co. LLP
Steps to take when your customer doesn’t pay
When a client doesn't pay their invoice on time, it's crucial to take proactive steps to address the situation, said Miller. Follow these steps to attempt to collect your B2B payments.
[Read more: Customers Not Paying? How to Improve Your Collections]
Talk to your customer
Miller noted that communication is key for handling nonpaying customers. Your first step should be to contact the client via phone or email about their overdue payments.
“Reach out to the client promptly to understand the reason for the delay and discuss potential solutions,” he said. “It might be a simple oversight or a financial constraint on their end.”
Send an invoice reminder
If you’ve attempted to contact your customer to no avail, send a physical reminder after an appropriate amount of time — ideally a week or so. Maintain a friendly tone and offer understanding to the customer rather than taking an accusatory tone.
Begin a reminder process
After exhausting the previous steps, start the dunning process. This systematic collection strategy intensifies over time, typically involving a written reminder followed by two warnings, before escalating the matter to a collection agency to recover outstanding payments from customers.
Don’t do any more work
You should not do additional work for clients with outstanding balances until they have paid in full. Continuing without full payment poses additional financial risks for your business.
Enter formal dispute mediation
Consider bringing in a neutral third party to mediate disputes with your B2B customers. During this process, a mediator facilitates meetings, assisting both parties in reaching a mutually agreeable resolution.
Initiate legal dunning procedures
As an extreme measure in instances where a client won’t pay, a judicial dunning proceeding may be necessary. This legal action leads to the client receiving a summons to either settle the payment and close the case, dispute it and possibly escalate to court, or face enforcement actions if ignored.
When to hire a collection agency
When all of your other strategies fail to get your client to remit outstanding payments, it may be time to call a third-party collection agency to help. Though it is important to maintain a positive relationship with B2B customers as best as you can, the relationship must be set aside if a customer’s late payments are causing financial hardship for your business.
Other situations may also necessitate the hiring of a collection agency, such as instances where the delinquent company has been acquired or if it has a pending sale. Additionally, if a customer relationship has been terminated, it can be beneficial to hire an agency to do the heavy lifting.
[Read more: What to Do When Customers Don’t Pay]
How to avoid nonpaying clients in the future
One of the best ways to avoid late or missed payments is to set clear policies and expectations upfront with current and future clients.
“Establishing clear terms and consequences for late payments in your contract can serve as a deterrent,” said Miller.
If you’re uncertain about a client’s ability to pay, you can ask for a deposit to mitigate future financial loss or require full payment before the completion of the project.
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