B2B sellers offer their goods and services and close deals. Then they cross their fingers, hold their breath, and wait to get paid! Payments may come in on time. But, that’s not always the case – causing payment collection headaches.
The EU’s Late Payment Directive puts clear demands on buyers. But, ‘more than 60% of EU businesses are still not paid on time, and small and medium-sized companies (SMEs) are most affected’.
In this blog post, we’ll look at some typical problems or challenges that affect payment collection for B2B businesses. Then, we’ll dive into some suggestions and provide a solution that eases the burden of payment collection.
What are some typical payment collection problems that businesses face?
In the context of B2B transactions, companies may encounter several problems around payment collection. All of the problems lead to stress, increased costs, and can eat up precious time. Let’s jump in and have a look at some of the challenges, starting with the SME killer – late payments!
Late payments
Late payments can be a significant issue for companies, especially for SMEs. They disrupt cash flow and create financial difficulties. What’s worse, is that some customers may delay payments intentionally or unintentionally. To some extent that’s understandable. One wants to hold on to their cash to the last moment. But, this can cause cash flow problems for the business expecting the funds.
Another way to look at this is non-compliance with agreed payment terms. Some customers may fail to adhere to agreed-upon payment terms, such as net 30 or net 60 days. This result is financial strain for the seller, as they may have already incurred expenses while waiting for payment. They may have invested heavily into delivering the goods or services.
For 2022, 43% of Western European B2B invoices for small businesses are late, while 6% are written off as uncollectable. For medium-sized Western European enterprises, 41% are late and 6% are also uncollectable. Similar stats emerge for Eastern Europe B2B payments, with 43% of all sales being paid late, and 6% considered bad debt.
Cost of payment collection – money and stress!
If a company is struggling to collect payment, they may turn to a debt collection agency. But, this may be after they’ve already used up internal resources. All at a cost and often taking up a lot of time. Using such an agency could have a big cost – often double digit percent fees. So the payment collection process takes a long time, and often puts one cost on top of another.
Fees may vary based on the age and size of the debt and whether it’s a one-off or a bulk account. Imagine a debt collection agency charging 20% for a 10k EUR late payment – you’ll get 8k but pay 2k as the fee. The upside is at least you’ve received 80% of the owed money rather than 0%. But, could there be a cheaper end-to-end alternative?
Disputes over invoices
Discrepancies or disputes over the terms, pricing, or quality of products or services can lead to delays in payment. Resolving these disputes can require additional time and resources. Beyond delayed payment collection, a loss of trust between business partners is a likely result.
Inefficient payment processes
Companies may struggle with manual, time-consuming, and error-prone payment processes. Payment collection process can lead to delays and inefficiencies if they involve:
- excessive paperwork,
- manual reconciliation, or
- multiple systems.
Lack of payment visibility
Tracking and monitoring payments across various channels and customers can be a challenge. Beyond a certain level of chaos and the unknown, what’s the problem with that? Without clear visibility into payment status and pending invoices, managing cash flow is a real challenge.
Difficulties with international payments
Did you know that global B2B cross-border payments increased from $137 trillion 2020 to $150 trillion in 2022? Is your business involved in cross-border transactions? Then you know that collecting payments can be complicated due to any of these factors:
- Currency conversions
- International banking processes
- High transfer fees
- A labyrinth of differing tax laws and regulations
- Varying payment regulations in different countries.
These complexities may lead to delays and, unfortunately, additional costs.
Credit risk and bad debt
Companies may face the risk of customers defaulting on payments. This could result in bad debt. Assessing creditworthiness and managing credit risk is crucial. These processes minimise the impact of non-payment. But, making the right assessments traditionally takes a lot of time.
Inadequate payment collection strategies
Some businesses lack effective strategies for payment collection. How sufficient are communications with customers regarding payment expectations? Is the company offering convenient payment methods? Is there a failure to put in place reminders and escalation processes for late payments?
How can B2B sellers overcome payment collection challenges?
We don’t want you to think it’s all doom and gloom around payment collection. Companies can implement various measures to overcome the challenges. Some include establishing clear payment terms, automating payment processes, utilising online payment platforms, conducting credit checks, improving communication with customers, and implementing robust collections strategies.
One thing is abundantly clear, though – faster payments improve cash flow and a company’s financial health. Let’s look at the ways that help to mitigate risks associated with payment collection in B2B transactions.
Clear payment terms and agreements
Clearly define everything! Payment terms, due dates, late payment penalties, and any discounts for early payment. Ensure you communicate all the conditions and both parties agree before initiating any business transactions. Expectation management goes a long way to reduce the likelihood of disputes or misunderstandings.
Automated payment processes
Implement automated payment processes to streamline collections. Utilise invoicing software or accounting systems that generate invoices and reminders automatically, reducing the manual effort required. Automation can help improve accuracy, efficiency, and speed up the payment collection cycle.
Online payment options
Offer convenient online payment methods to your customers. Some evidence shows that B2B purchases are getting younger. And, they expect their B2B purchasing experience to be similar to what they are used to in their private lives with B2C. Providing multiple payment channels makes it easier for customers to pay promptly or in a way that makes it more workable. This reduces the likelihood of delays.
However, our conversations with customers shows that not all B2B businesses are ready for selling online. But, we still recommend having easy-to-use and efficient online payment options available. They are attractive – and becoming more and more attractive – to many.
Regular communication and reminders
Establish effective communication channels with customers to ensure they are aware of payment due dates and any outstanding invoices. Send timely reminders before and after the due date to prompt timely payment. Consider automated email notifications or text messages to improve the effectiveness of reminders.
Credit checks and risk assessment
This should go without saying, but here goes. Before extending credit to a customer, conduct thorough credit checks to assess their financial stability and creditworthiness. This helps reduce the risk of default or non-payment. Consider using credit reporting agencies or trade references to gather relevant information. New digital solutions are coming into play beyond the traditional credit checking mechanisms.
Payment incentives and discount
Offering incentives such as early payment discounts or rewards encourages prompt payment. Everyone likes to save a bit of money if they can – so it’s a win-win. Your customer pays slightly less, and you get your money on time, or even early.
Collections policies and escalation procedures
Develop clear collections policies that outline the steps to be taken when payments are overdue. Establish a systematic approach for escalating collection efforts, such as sending formal collection letters or engaging a collections agency if necessary. Define the timeline for each step and ensure compliance with applicable laws and regulations.
The EU, in line with the LPD, has rules about interest and even provides a handy little late payment interest calculator here.
Improve payment visibility and reconciliation
How do you keep track of accounts receivable? Implement tools or systems that provide real-time visibility into payment status, pending invoices, and reconciliation. This helps monitor and manage cash flow effectively, enabling proactive measures to address any discrepancies or delays.
International payment considerations
When dealing with international payments, research and understand the specific payment regulations and banking practices in the relevant countries. Use international payment platforms or services that simplify currency conversions and facilitate secure cross-border transactions. Investigate what emerging digital trade technologies could ease international payments – and implement ones appropriate to your needs.
Customer relationship management
Maintain strong relationships with your customers. Never overrate or underestimate great customer service. Things can go wrong. Correction – things will go wrong! Make sure to make these steps habit:
- Regularly communicate with your customers
- Address any concerns or issues promptly
- Generally provide exceptional customer service.
Do this and you’ll have a foundation to encourage timely payments and foster trust and loyalty.
By using some of the ideas above, companies can mitigate payment collection risks. They can also improve cash flow and establish more efficient and effective B2B transaction processes. What if there were a silver bullet?
How does Terms.Tech help sellers?
We propose Terms.Tech for both online and offline B2B sellers and marketplaces, delivering delayed payment terms across all of the EEA and Switzerland. It’s like a one-stop shop to reduce payment collection pain points no matter which industry you’re in.
Terms.Tech takes the payment collection burden off of the seller’s back. How does this work? A seller partners with Terms.Tech, thus offering buyers delayed payment terms. A buyer can choose to purchase with appropriate terms based on Terms.Tech’s lightning fast onboarding and assessment processes. For a small fee, Terms.Tech pays the seller up front (i.e. when the product or service is delivered).
Terms.Tech eliminates payment collection stress
At this point, as the seller, you have your payment. That means there isn’t any need for you to go through traditional payment collection processes. Late payments are simply not an issue anymore. Terms.Tech is like a digital payments stress ball: gone is the stress and the awfully large amount of time that comes with payment collection processes. Additionally, the risk of potential customer fallout is mitigated.
Your DSO goes down. Your cash flow and working capital go up, which you can devote your working capital to more deals and delivering more products and services.
TL;DR – Terms.Tech takes on sellers’ payment collection responsibilities and enables them to have the means they need to drive their business forward.
Set up a call to find out how Terms.Tech can help you
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