Filed Under:Risk Management, Loss Control

When Customers Don't Pay

Use these A/R best practices with trade credit insurance

A non-payment event, no matter the size, can feel overwhelming. The damage isn't cleaned up overnight, and it can be an ongoing challenge to restore optimism and trust.

Non-payments can damage your company on multiple fronts. Ignoring even a small invoice can hurt your bottom line, especially if you depend on receiving a payment in time to pay expenses, or if you have a “concentration risk” where you depend on just a few key customers.

What do you do when a customer doesn't pay? Knowing where to start is essential.

1. Contact the Customer

Sometimes a phone call or resending the invoice is enough to secure payment. If this doesn't work, explain the consequences of non-payment in a courteous way, whether it's discontinuing their service or reporting their delinquency to a credit-rating organization if the payment is not received in the agreed timeframe.

2. Call a Collection Agency

If contacting the customer isn't successful, you could call a collection agency. By tasking another company with collecting the payment, you free up your staff's time for other work. This may be the best solution for small payments, as the collection agency takes part of the recovered sum as payment. For larger delinquent accounts, it may be necessary to file a lawsuit. Talk to your attorney about how to proceed in your state.

3. Pay Attention to Your Staff

Your cash flow may be affected, and employee morale may be impacted, especially if you have to introduce job cuts and other cost-saving measures to remain competitive. Maintain open and honest two-way communication between employees and management about the situation, what is being done to resolve it, and how things will proceed moving forward. Maintain trust by making sure that payroll is met, possibly with a bridge loan or other financing. If your employees stop trusting you, you could end up facing even bigger issues, like lost staff and reputation.

Avoid Non-Payments from the Start

The first time many businesses look into their loss-mitigation options is when a client doesn't pay. You might find that you don't have the time or resources to pursue the issue in court or through a collections agency, especially for small amounts. Additionally, these options can be of limited use if the non-payment was due to an insolvency or formal bankruptcy.

You can make nonpayment less likely to happen by evaluating and mitigating your accounts receivable (A/R) risk using the following best practices:

1. Start with the Basics

Develop and adhere to a standardized process to make sure invoices are sent out regularly. Take steps to address non-payments as soon as a receivable becomes overdue. Sending notices of late invoices helps highlight the issue, and the practice provides a valuable paper trail if you need to escalate the matter later.

Also make sure that the employee overseeing your A/R is aware of the legal rights afforded by your location and any statutory limitations to which your company may be vulnerable. Remember that in the case of a smaller claim, you may be able to represent yourself in small claims court and avoid legal fees.

2. Standardize Business Practices

To collect on a receivable, you need documentation supporting your claim. Every time you work with a customer, create a contract that specifies the work or products you provide as well as the payment schedule to which your customer has agreed. Spell out the timeline and the consequences of late payments.

Consider hiring an attorney to draft your company's standard terms and conditions. These conditions should specify the customer's agreement to cover all costs related to debt collection, including third-party collection expenses, late fees and legal fees. Require customers to agree to these terms when dealing with your company.

3. Implement New Policies

If non-payment has been a real issue for your company, you may also want to institute new policies to protect yourself. Many companies use down payments, cash-up-front terms, retainers or milestone payments to minimize the amounts they could lose. Another option could be to keep an alternative form of payment on file such as a credit card, and include in your agreement a remedy to charge the account in the case of a missed invoice.

4. Protect Your Receivables with Insurance

In addition, consider credit insurance, also known as accounts receivable insurance. Like other types of insurance that protect your assets from unexpected loss, credit insurance protects accounts receivables, your largest and most vulnerable asset.

Moreover, a credit insurance policy with a world-leading carrier is more like a partnership with a worldwide network of risk-management experts. The carrier provides data and insights to help you pick the right customers to do business with, monitors their financial health throughout the year, and reimburses you in the event a covered customer fails to pay.

This allows a company to reduce the risk it might incur when taking on new — particularly unknown — clients, or when unforeseen economic, business or other factors affect its clients’ abilities to pay their bills. It enables a company to cultivate clients in sectors or geographies that are outside its normal client base or geographic market, do more business with existing clients, and extend more credit to its customers, all without increasing the risk of non-payment.

James Daly is CEO at Euler Hermes Americas. Contact him at James.Daly@eulerhermes.com.

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