When Customers Do Not Pay – Four Steps for Successful Receivables Management
Payment processing generally runs smoothly and on time. However, customers may sometimes pay an outstanding invoice only after the due date or not at all.
There are many reasons why payments can be delayed – from a customer simply forgetting to complete a transfer manually, all the way up to blatant refusal to pay. If cases like this occur, it is time for sellers to get active. When seeking to recover the missing funds, it is a good idea to perform an internal check and send out payment reminders. But is some cases, it is also necessary to commission a collections agency.
Before introducing the initial steps for demanding payment of the outstanding amount, it is worth first taking a closer look at the business partner in question. Is this a customer that has a longstanding relationship with the company and is otherwise generally reliable? If so, it makes sense to send the customer a friendly reminder, for example calling them to let them know that an amount is now overdue. However, if you are dealing with an unknown customer that is difficult to assess, a prompt payment reminder is typically the best approach. When addressing a customer of an online shop, for example, the consumer must be assigned 'in default' status – which is what payment reminders are for. But in certain circumstances, customers are already informed when the invoice is sent out they are now in default following expiry of the payment deadline. However, since it is also possible that customers have simply forgotten to pay the invoice in question, a reminder can be used as the first step. If this payment reminder and, depending on the approach adopted, further reminders remain unsuccessful, a collections agency or lawyer can be engaged to introduce a pre-court dunning procedure and, if necessary, subsequently a judicial order for payment. The following approach generally makes sense when dealing with outstanding invoices:
Step 1: Internal check
Before entering into any form of contact with the customer that owes an outstanding amount, a check of the internal processes should first be performed. Was the invoice issued and sent out correctly? Did it actually arrive? Was the payment deadline clearly stated? As soon as you are certain that the customer in question really has not paid, they are then contacted in the next step. If the customer is known, a friendly phone call or e-mail asking whether they have received the invoice is a good option. However, this approach is rarely adopted, particularly in the retail trade. The next step is therefore pre-court receivables management.
Step 2: Sending out payment reminders
As soon as the customer has exceeded the defined due date for payment, a reminder can be sent out at any time. This first reminder typically does not include any reminder fees. However, it is crucial to state a new deadline for settling the outstanding amount and, if necessary, inform the customer that legal action will be taken if they do not pay (on time). It is important to comply with these formalities. It should also be noted here that all reminders are essentially the same from a legal perspective, but that many companies choose not to attach any fees to the first reminder out of goodwill. Yet if the debtor still fails to display any reaction to a reminder, it is then possible (although not legally necessary) to send a second or third reminder. Any further reminders sent address the same issue, i.e. settlement of the outstanding amount. Only the respective payment deadlines and reminder fees can change in this case. Pursuant to § 288 of the German Civil Code (BGB), default interest of 5% may be demanded for the outstanding payment. In addition to this, the creditor has the right to charge an additional fixed compensation fee of €40 after the second reminder. The tone used becomes increasingly urgent from one reminder to the next, but should always remain professional and neutral. If the customer in question still displays no reaction to the (third) reminder, the next step is to commission a professional collections agency.
Step 3: Supporting collections agencies
If no payment is still received, a collections agency can take over the case. Since collections agents are not permitted to assume judicial representation, this service should be used if the receivable is unequivocally verifiable and any objection on the part of the customer can definitely be ruled out. There are two different approaches when engaging a collections agency, whereby the agency either collects the debt from the customer or purchases the receivables directly (assignment of receivables or 'factoring').
Assignment of receivables (factoring)
The collections agency purchases the receivables, meaning that the outstanding amount is received directly. However, the service provider commissioned also retains a portion of the total outstanding amount. Should the agency fail to collect the funds in question, they then have no choice but to accept the loss on receivables.
Receivables management
In this case, the collections agency assumes responsibility for receivables management - which therefore includes communication with the debtor, as well as the payment transaction itself in the first step. To collect the funds in an extrajudicial procedure, the collection agency communicates with the non-paying customer by issuing a final notice or debt collection letter. With this approach, the collections agency invoices the service rendered and demands payment of the costs by the debtor. If successful, the customer must then settle the purchase price owed, plus the reminder fees and the costs of the collections agency. However, if the collections process fails, creditors must bear the associated costs themselves. Like a lawyer, the collections agency is entitled to initiate judicial dunning procedures here. This can then represent another step as and when necessary.
Step 4: Judicial dunning procedures
If the extrajudicial collections process proves unsuccessful, the next step is to initiate enforcement proceedings. This requires an application for a final notice to be submitted to the court. The court then issues this notice, which is sent to the customer. If the customer fails to submit an objection within 14 days or still refuses to pay, an enforcement order can be requested. If the customer also fails to submit an objection to this, enforcement can be requested and executed by a bailiff. It is important to note here that the costs for enforcement must initially be borne by the company commissioning this, although they can be reclaimed from the customer at a later date. If, despite all of the efforts, the customer still refuses to pay the outstanding amount or submits an objection, the funds can only be secured through legal action. It makes sense to commission a lawyer here to represent the company's interests in court. The costs associated with commissioning the lawyer can also be reclaimed from the customer in addition to the outstanding payment in this case. Customers generally pay directly, but should a payment default still occur, you can rely on these four steps. However, whether payment defaults are all treated the same, how quickly a payment request is sent out, as well as the number of reminders and how the ongoing process is handled all depend heavily on the respective customer relationship and the outstanding amount. To prevent payment defaults caused by missing information or forgetfulness on the part of customers, it is worth taking another critical look at your own communication. Were the payment terms conveyed clearly enough? Are they positioned in such a way that they are clearly visible?
You can find further information in and around the topic of collections management here.