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 makes the demands on buyers very clear. But, collecting unpaid invoices remains challenging: ‘more than 60% of EU businesses are still not paid on time, and small and medium-sized companies (SMEs) are most affected’.
What are typical B2B payment collection problems?
Companies doing business-to-business (B2B) trade encounter several problems around payment collection. All lead to stress, increased costs, and eat up precious time. Let’s start with the SME killer – late payments!
Late payments hurt cash flow
Effective accounts receivable management can optimize cash flow and improve client relationships. Late payments are a significant issue for many SMEs.
Outstanding payments disrupt cash flow and damage financial health. 43% of Western European B2B invoices [1] for small businesses are late, while 6% are written off as not collectable. For medium-sized Western European enterprises, 41% are late and 6% are considered bad debt (unpaid debt that will not be recovered).
Similar stats emerge for Eastern Europe B2B payments [2]. 43% of all sales are paid late, and 6% impossible to collect.
Non-compliance with agreed payment terms means a customer fails to adhere to agreed-upon payment period, such as net 30 or net 60 days. The seller may have already incurred expenses while waiting for payment. They may have invested heavily into delivering the unpaid goods or services. They may now need to spend additional resources on collection efforts or even legal action.
Some customers may delay money owed intentionally or unintentionally. To some extent that’s understandable. One wants to hold on to their cash until the last moment. But, it risks late fees and hurting business relationships and trust. Additionally, this can cause cash flow problems for the business expecting the funds.
What is the cost of payment collection? Money and stress!
A world without business debts would be wonderful! Unfortunately, that’s not the case.
If a company struggles to collect payment with their internal collections process, they may turn to a debt collection agency. Internal B2B collections process may include, e.g. initial communication, gentle reminders, demand letters. Debt recovery comes at a cost and often takes up a lot of time. On top of that, using external debt collectors who charge double digit percent fees add up.
Debt collection 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 B2B debt collection agency charging 20% for a 10k EUR late payment. The merchant will retrieve 8k outstanding debt but pay 2k as the fee. Could there be a cheaper end-to-end alternative avoids unpaid invoices and ensures timely payments?
Disputes over invoices
Discrepancies or disputes over the terms, pricing, or quality of products or services lead to delays in payment. Resolving these disputes between businesses can require additional time and resources. Again, a loss of trust and a breakdown of customer relationships is a likely result.
Inefficient payment processes
Traditionally, collecting payments is manual, time-consuming, and error-prone. Collections processes can lead to delays and inefficiencies if they involve:
- complex collection policies,
- 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 and accounts receivable management are real challenges.
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 and many businesses don’t have the expertise.
Inadequate payment collection strategies or accounts receivable management
Some businesses lack effective strategies for payment collection. How sufficient are communications with customers regarding payment expectations? Does the company offer convenient payment methods and payment plans? Are there a lack of systematic reminders and escalation processes for upcoming due invoices and subsequent successful debt recovery?
Others may have sub-standard or antiquated accounts receivable management in place. Making that more efficient could prevent the need for collection services. Prevention is better than the cure, as they say!
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. Automate payments, use online payment platforms, conduct credit checks, improve communication with customers, and implement robust B2B debt collections strategies.
One thing is abundantly clear. Faster payments enhance cash flow and a company’s financial health. Although business reputation increases for those who pay on time. mitigating risks associated with payment collection is crucial. Let’s look at some B2B collections best practices.
Clear payment terms and agreements
Clearly define payment terms, due dates, penalties, late fees, and any discounts for early payment. Ensure you communicate all the conditions and both parties are on the same page before initiating any business transactions. Expectation management goes a long way to enhance customer relationships and reduce the likelihood of disputes or misunderstandings.
Automated payment processes
Implement automated payment processes to streamline collections. Use invoicing software, collections software, and/or accounting systems that generate invoices and reminders automatically. Automation can help improve accuracy, efficiency, and speed up the payment collection cycle in your accounts receivable process.
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. Payment plans best suited to customer needs reduces the likelihood of delays.
However, our conversations with customers show that not all B2B businesses are ready to sell online.
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 deadline 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 B2B debt collections policies that outline the steps to be taken when payments are overdue. An effective collections policy streamlines operations and promotes customer loyalty.
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. Nonetheless, make sure late fees are transparent.
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 reduce the risk of financial difficulties. 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.
A strong customer success approach sets 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?
What are the differences between B2B and B2C collections?
Unlike consumer collections, B2B collections involve larger invoice amounts and more significant client relationships. B2B accounts typically have longer sales cycles compared to business-to-consumer (B2C) accounts. And, B2B clients often require bespoke payment choices to meet their business needs, contrasting with B2C clients.
B2B collections are less strictly regulated than B2C collections, allowing for more flexibility in approach. But, the stakes in B2B collections significantly impact a company’s cash flow and future success.
B2B collections involve assessing the complexity of business debts, including the need for trust and evaluating customer needs. The decision-making process around B2B collections processes must be deliberate and measured. Maintaining positive business relationships is crucial in B2B collections so businesses preserve long-term partnerships.
What are legal steps for recovering debts?
In B2B collections, the process may escalate through demand letters before considering legal action. A demand letter can indicate the involvement of legal counsel (or the involvement of law firms) and outline the debtor’s options.
Legal action in B2B collections should only be considered a last resort in the collections process due to the importance of maintaining relationships. The use of demand letters can prevent the need for litigation by resolving disputes early in the collection process. Businesses must be careful before litigating to avoid damaging relationships and incurring costs.
How does Terms.Tech help sellers with their collections process?
Terms.Tech delivers deferred payment terms in business locations all across the EEA and Switzerland for both online and offline B2B sellers and marketplaces. It’s a one-stop shop to reduce payment collection pain points (overdue payments, the need for collection services, high DSO, strained customers relationships, etc.). Almost all industries are welcome!
How does Terms.Tech eliminate payment collection stress?
Terms.Tech takes the payment collection burden off of the seller’s back. How? A merchant or marketplace partners with Terms.Tech. The buyers then choose from flexible payment options based on Terms.Tech’s lightning fast onboarding and risk assessment process. For a small fee, Terms.Tech pays the seller up front (i.e. when the product or service is delivered).
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. Worrying about accounts receivable and b2b debt collection decreases because overdue payments are simply not an issue anymore when customer purchase via Terms.Tech. No more collections agencies!
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. Business cash flow and working capital go up. Instead of focusing on collection efforts, you can focus on maintaining business relationships and increasing deals and your customer base.
TL;DR: B2B collections
Terms.Tech pays sellers upfront. We take on the seller or marketplaces’s payment collection responsibilities. We enable them to have the means they need to drive their business forward.
Business owners and CFOs can sleep well at night!
How can I get set up with Terms.Tech’s BNPL service?
🤝 Why wait to find out more?
Get in touch with our Terms.Tech consultants and see what the best BNPL solution is for you.
Sources since unpublished:
[1] – Atradius B2B Payment Practices Trends Western Europe 2022
[2] – Atradius B2B Payment Practices Trends Eastern Europe 2022
