Every business who sells goods or services on account will face late payments and even defaults sooner or later. No matter how stringent your credit policy is and how careful you are with prescreening your customers, some of them would skip payments at some point of time. Smarter entrepreneurs anticipate non-payment scenarios and budget allowances for bad debt, as well as build cash reserves to cover possible losses.

Most small business owners and managers start panicking, once overdue accounts receivable start piling up, especially if sales on account represent a significant portion of overall sales. Having high receivables may look great on your balance sheet and boost your sales volume, but unpaid invoices don’t help once your payroll or lease comes due. For most business people cash shortages may create a good chunk of stress, and some start harassing their clients, often creating resentment on both sides.
The best way to chase down unpaid invoices is to establish the reason for non-payment, come up with a plan to resolve the issue, and stick to it. Most entrepreneurs do not realize that a solid portion of unpaid receivables is their own fault: improper planning, poor recordkeeping, or lack of communication. Let’s take a look at common reasons your customers skip payments and try to run some solutions.

Miscommunication

Proper communication is the key in any business relationship. Oftentimes a reason for non-payment of invoice due is simply an oversight made by one of the parties. Below are some examples with solutions.

You’ve sent it, they never got it People do make mistakes. Billing clerks, postal employees, receptionists and mailroom workers, accounts payable specialists – they all are suspects when that invoice ends up being unpaid. Every time you don’t see a payment reach your bank account on time, pick up the phone and make a call. If an invoice truly has been lost in transit, just resubmit it for payment - some customers would even take your word for it, and release the payment before getting a duplicate bill.

Missing paperwork
Invoicing is not always as easy as it may seem. Larger companies would only issue a check when all paperwork is intact, with no exceptions made. Their logic is very simple: their payables people do not know you, your business, and your product or service. The only thing they rely on is documentation that may sometimes seem excessive to you.

Let’s say, for example, your business supplies milk to a store chain on a daily basis, and you bill your client every month. Your monthly invoice would probably weight several pounds and consist of daily slips for each location with receiver’s signatures on them; invoices sorted by each store you made deliveries to with subtotals; and a master invoice with total charges on it. This is where your billing person should really pay some attention to detail! Should any of those documents carry mistakes or have information missing, get prepared to get no payment or partial payment only.

The best way to deal with it is to keep constant communication with your key clients. A good thing is that large companies usually have a separate payables manager assigned to a group of vendors, so chances are you are going to chat with the same person every time. Your billing person should communicate at least three times during each billing cycle with your client’s representative: first time to check whether an invoice was received, second time to ensure all supporting documents are intact and there are no unresolved issues, and third time to politely check when the payment is scheduled to be issued.

Payment Stretchers

Every business that has a large portfolio of direct bill clients knows the type: solid and long-established business with good credit history and decent sales volume that always pays their bills late. These clients usually do not pose serious threat and may be subcategorized into two groups.

First group is made up of businesses that have a laid-back approach to payables management. They always issue full payments on invoices, but with some kind of delay – some pay a week or two late, other wait for a new invoice to come in before they start dealing with the previous one. Paying late seems to be a part of organizational culture for them. They are difficult to deal with, as payment reminders are almost never efficient, and attempts to impose late fees or charge interest simply insult them. Truly the best way to deal with such customers is to collect a back-up payment method – get a credit card authorization letter on file and charge it once the payment becomes past due.
Second group includes businesses that have sales and inventory cycles that are very different than yours. If you have been working with clients across different fields over extended period of time you may have noticed that companies working within certain industries have similar payment patterns. For example, construction companies, wholesalers and manufacturers tend to run past due way more often, compared to retailers, hoteliers, and restaurateurs. Explanation is very simple: their industry-wide payment practices do not fit your standard billing arrangements. Typically, such clients run uneven purchasing patterns, pay regularly in partial installments and almost always have account age between 30 and 60 days late, rarely going current or falling sixty or more days behind. For some, such clients may represent a sizeable portion of business and the best way to deal with it is to have a dialogue aimed to determine your customers’ trade patterns and cash flows and work out an installment plan comfortable for both parties.

Non-Critical Supplier

This is how some of your clients perceive you when it comes down to paying bills. They usually move you down on payables list for one of the two major reasons: a) your products or services are not vital for their business; b) they have other suppliers with stricter payment policies. They are a true headache for your receivables employees and require constant attention. Such businesses either have poor cash flow planning or are in a rapid growth stage, experiencing cash fall-outs due to mismatching payable and receivable arrangements and deficit of financing.

Dealing with such customers could be challenging and typically requires a set of actions. First, you should make clear that having your invoices paid late is unacceptable and give a short grace period to pay any outstanding balances as a good faith gesture. Should the situation persist, you may consider freezing an account and only conduct any future business on COD basis, while trying to collect past-due amounts. Many business owners and managers try to stay away from such measures as they are simply afraid to lose business, however, making such steps may prevent you from inflating your receivables with delinquent accounts. At this point, it is your customer’s call: either to stop conducting business with you altogether or to work out an arrangement that would be beneficial to both parties. In the first case, you should immediately pursue all available collection efforts. Second scenario gives you an opportunity to re-negotiate account terms that are more beneficial to you.

Force Majeure

An unforeseen act of God, a circumstance beyond reasonable control, a happenstance never meant to happen - every business runs a risk of unexpected disaster: fire, flood, machinery breakdown, strike, and bankruptcy of a key client, just to name a few. When it happens, it is a real stress for business owners and managers that truly tests survival abilities of a company. It could happen to you as well as to any of your clients.

It could very well be the case when you stop getting payments from your long-trusted business partners. Experienced entrepreneurs usually act quickly when their business takes an unexpected hit, evaluating damage and making necessary arrangements with suppliers, clients, and lenders. Therefore, in some cases you may be contacted and asked to temporarily adjust account terms, whether it is going to be longer repayment period, partial payments, or higher spending limit. In other cases, you may find out that your client is having difficulties only after the account went into past due status. There is not a set scenario how to act in such cases. Obviously, demanding full payment immediately is not going to bring any results, so you would have to work out some kind of temporary arrangements. The scope of such arrangements should generally depend on several factors: outstanding debt and aging, the amount of business transacted, length of your business relationship, objective evaluation of your client’s current financials, and possible effects on your cash flow.

Unresponsive Delinquents

You are going to have a small group of clients that have been unresponsive to your payments requests and have made very little, if any, progress in reducing the amount of outstanding debt. Some of them might have made promises never to be kept; the others could have been totally ignoring your calls and letters. Once you’ve seen past due amounts move behind 90 days and felt that all in-house collection efforts have been exhausted, you may consider forwarding this matter to third party.

The most common route is using a collection agency. Debt collectors have resources handy you may not have, including trained personnel and in-depth knowledge of collection practices and laws. Collection agencies provide their services based on commission, typically ranging from 25 to 50 percent of amounts recovered. You may find some collectors that charge a flat fee. You should shop around before signing up with any particular collection agency.
Small claims court could be an effective tool to recover what is owed to you. There is a limit of how much you can sue for that differs state to state. Major benefit of using small claims court is that no attorney is usually needed and filing fees are truly nominal. There is also an element of psychological influence – filing a claim shows your debtors how serious your intentions are – few companies or individuals would want to stretch their financial matters this far, and in some cases you might be even able to collect the monies before appearing in front of a judge.

Using the services of an attorney is usually the last resort and should be considered when large amounts are involved. Before considering contracting a lawyer you have to make sure there are sufficient assets in possession of your debtor, otherwise you may end up parting with a good chunk of cash for a judgment you’d never be able to collect on.