We have worked with all sorts of clients in our role as an accounts receivable (AR) factoring company. Although it doesn’t affect us directly, one of the difficulties we frequently observe involves a company trying to figure out how quickly to cut off non-paying customers. The decision is not always an easy one to make.
Clients sometimes come to us looking to factor their invoices in order to make up for a shortage of cash. In assessing their individual situations, we learn that they are struggling with non-payers. It is not a pleasant situation to be in. Non-payers affect a company’s ability to stay in business.
The 7 Steps of Collection
As a general rule, a non-paying customer is one who has exceeded invoice terms by 60 days or more. So if your normal terms are 30 days, any customers whose bills remained outstanding at the 90-day mark would be considered non-payers. Between 30 and 90 days, they would be considered late payers.
Companies tend to follow a seven-step process to address late payers before they become non-payers:
- Sending polite reminders
- Making direct contact over the phone
- Making contact with the customer’s billing department
- Sending a final notice of payment due
- Cutting off future services or sales
- Bringing in a collection agency
- Taking legal action in civil court
The fifth step is the tricky one. Should companies wait a full 90 days before cutting off non-payers? At first, that might seem reasonable. But waiting 90 days could mean accruing additional debts through future sales. What is sold to the company on the 89th day could still be outstanding 90 days from that point – in addition to what was sold on day one.
A Motivation to Pay
It has been our experience that clients looking to factor invoices due to non-paying customers don’t really relish the idea of civil litigation. They do not want the hassle or expense. More importantly, they don’t want to be seen as the bad guys. Cutting non-payers off sooner could help by motivating slow payers to settle up before civil litigation is ever a thought.
Let’s face it, there will always be customers willing to push invoice terms to the limits. There will also be those who insist on paying late. In both cases, a lack of cash flow on the customer’s part may be the culprit. It could also be that the payables department isn’t run very well.
Regardless of the actual reasons, being cut off could be enough to get management’s attention. Maybe management doesn’t know that invoices are not being paid. They would certainly know if their company was cut off from the products or services they need to keep the business in operation.
A Fine Line to Walk
Doing business on credit establishes a financial relationship that can be difficult to navigate. It’s a fine line to walk when you sell to customers on credit. Your company is spending money to provide services or products. You will continue spending money while you wait to be paid. However, you cannot afford to keep doing so indefinitely.
On the other hand, you want to be as gracious and patient with your customers as possible. You know that treating them well increases the likelihood of them sticking with you over the long term.
When customers don’t pay, you may be forced to cut off products or services. Should you wait until the 90-day mark to do so? Should cutting off non-payers be the fifth step or the second? Every company needs to decide for itself on the best course of action.