Late payments and unpaid invoices weigh heavily on a company's financial health. To manage your finances, it is essential that you put in place an effective recovery strategy, while maintaining a commercial relationship with your customers.
Take care of your invoicing upstream
The first building block of a successful recovery strategy is implementing effective invoicing. This means before starting to recover your unpaid amounts, your company must implement everything you need in order to be paid on time. Clear invoices that are complete and free of errors are a good start to persuading your customers to settle up before the payment deadline. Also think about creating general terms and conditions that 'protect' your interests, by including (reasonable) deadlines for contesting and sanctions applied in case of default of payment. Finally, your whole invoicing process needs to work together like a well-oiled machine in terms of quality, timing, terms and more.
Adapt your approach
Next, you need to have a clear view of your outstanding receivables (customers, amounts, delays, etc.). An audit will allow you to properly assess the situation. When it comes to recovery, every case is different and varies depending on your sector, your size and your position (strong or otherwise) on the market. Moreover, one customer is not the same as another and you must often adapt your strategy. Your best customer, who always pays on time, cannot be treated in the same way as a chronic late-payer or a new purchaser (and did you think about checking their solvency before starting to do business with them?). Conclusion: separate your clientele using relevant criteria to be able to act in the best way.
Your recovery strategy must include a pre-emptive phase to intervene before the amount is due. How? By sending a simple e-mail, for instance, a few days before the payment deadline. This doesn't cost you anything and it gives a clear signal that you are waiting for payment. You could even add a commercial dimension here by asking your customer if they are satisfied with the product, the sale or the service. This type of diligence will be appreciated by your debtors. Along the same lines, and although it may be more costly in terms of resources, you could add a phone call from your sales team. In this instance (and all the others, in fact), you need to oversee the coordination of your sales and administrative department.
Articulate your recovery strategy
If your customers still don't pay, in spite of these preventive actions, you need to react quickly and send your debtors a reminder. Always follow through with what you have told them so as not to lose credibility. Get there slowly but surely – and attach real significance to the form and timing of your reminder letters. In your first letter use a courteous tone, because everyone forgets at some point. What if your debtor doesn't always react? Follow up with a second and (at most) third payment demand: a registered letter, possibly sent by a lawyer for the final reminder. Be increasingly firm and send a formal notice. Try to call your customer in between each attempt (especially those who are worth the effort). This is a great way of reaching a compromise, such as by suggesting a payment schedule if your debtor has specific problems with financial management. An amicable agreement is often better than a futile (and time-consuming) battle. And what's more, this may help you to continue your commercial relationship!
Follow through... if it's worth it
Are your reminders falling on deaf ears? Have you failed to receive a valid explanation? Have you even tried to negotiate in vain? It may (unfortunately) be time to revert to a higher power and take legal action. You won't be surprised to hear that this is the most complex, costly and time-consuming way to recover your unpaid amounts. This is why not all invoices are worth this amount of effort. Properly assess the situation (the amount of the invoice, the 'position' of the customer in your portfolio, etc.). If you're thinking about taking the matter to court, you should seek the advice of a lawyer. But remember there is no guarantee that things will be simple (from simple non-payment, to dispute of the invoice or even bankruptcy of the customer).
Final words of advice
Whatever the result of your recovery efforts, make sure to keep a record of any 'accidents' in terms of your customers' late and missed payments. This kind of monitoring may prove very useful in future. And last but not least, you could even choose to manage customer risk (completely or partially, upstream or downstream) using external actors (such as a lawyer or bailiff) or companies specialised in recovery (such as BNP Paribas Fortis Factor). This is a more expensive strategy, but guarantees you greater peace of mind, as long as you choose the right provider...
How does factoring work?
The principle behind factoring is simple: you assign your receivables (invoices) to a third party – the factor – with or without cover for the risk of non-payment. When you send your invoice to the debtor, the factoring company can pay an advance of up to 85% of the amount. That means you don't have to wait for payment and have immediate access to the funds. The factoring company is also responsible for monitoring and collection.
You have the option of using the following services, depending on your company's specific requirements:
Outsourcing of your accounts receivable administration
If you select this option, you assign all or some of your receivables file to the factoring company in exchange for a factoring fee. The factoring company performs the following tasks:
- entering invoices and credit notes after a thorough check and then updating the debtor data;
- checking and allocating incoming payments, including a check on partial payments and payment or invoice references;
- drafting and providing online reports and statistics, so that you always have a clear idea of the status of outstanding receivables and payments already received.
Good to know
The factoring company performs a thorough analysis before taking over your accounts receivable. It may decide to exclude some debtors contractually, for instance if they have a particularly poor credit rating, if they are natural persons or associated enterprises, operate in countries with a high default risk or have stated that they do not wish to pay via factoring.
Monitoring and collection of your outstanding invoices
In this case, the factoring company is responsible for collection of your outstanding receivables and following up on debtors by phone and with written reminders. This means you have more time to build up good relationships with your customers.
In practical terms, you issue your invoices and send them electronically from your accounting program to the factoring company, which is then responsible for collection and follow-up. Because of its expertise and experience, the factoring company is generally able to collect payment of the invoices 25% more quickly than your own accounts department. And as a third party, it is often more successful when it comes to payment notices.
You can track the entire process via an online application, so you are always aware of changes in your receivables portfolio. For instance, you can consult detailed information on your outstanding invoices, credit notes, payments and disputed payments at any time.
Advances based on the amounts of your invoices
In addition to outsourcing their receivables management, many companies that use factoring also call upon advances based on their outstanding invoices.
In this case the factoring company advances a percentage of the invoice amount (usually between 75% and 85%) immediately after receipt of the invoice. You receive the balance when the debtor has paid the factoring company. You pay interest on the amount advanced.
This form of advance has distinct advantages:
- You generate additional working capital on the basis of your outstanding receivables.
- You improve your cash position, so it is easier to invest or enter new markets. In addition, as a quick payer you can request healthy discounts from your suppliers.
- There is a direct link between your available funds and turnover growth: more sales means more funding for your company's continued growth.
Cover for the non-payment risk
Factoring companies offer various packages so that you can obtain 100% cover for the risk of non-payment of your outstanding invoices. That means you don't have to worry about the possibility of your debtors defaulting. This additional certainty of payment also makes it easier for you to offer more flexible payment terms, which could give you a considerable competitive edge.
The following risks are covered:
- Proven insolvency, for instance as a result of bankruptcy or judicial settlement.
- Probable insolvency: when the debtor has still not paid within a contractually agreed deadline after the due date of the invoice (usually ninety days).
If one of your debtors defaults, the factoring company will pay the entire amount of the invoice, within the predetermined credit limits, within the agreed deadline after the due date of the invoice.
Good to know
A credit insurance policy is also particularly useful to safeguard your export transactions.Through the credit insurer, you have access to:
- information on the credit ratings of your foreign debtors
- information on the specific risks associated with the country of destination
- bank and customs guarantees with your foreign trading partner
- a collection service if your foreign debtors don’t pay their invoice
What are the advantages of factoring?
Less risk, more working capital and, more especially, more time to focus on your core business. These are but a few of the benefits of factoring.
Do you frequently have a problem with unpaid invoices or late payment by your debtors, and does chasing this take a lot of time that could be devoted to selling?
Would you like to avoid the risk of non-payment and free up extra resources? If so, factoring could be the solution.
What are the advantages of factoring for your company?
You save time and money
By assigning your receivables administration to an external partner you can convert fixed costs to variable costs. Not only do you reduce your general operating costs and staff expenses, but you no longer need to constantly invest in new or changing technologies. You will also experience fewer problems in the event of extended absence, the departure of administrative staff or a temporary increase in the workload. However, the major advantage is that you have more opportunity to expand your business because you can devote more time to your customers.
You avoid non-payment
Because the factoring company examines your receivables portfolio thoroughly, you have a better idea of your debtors' creditworthiness. This screening can also apply to your domestic and foreign prospects. This means you always operate on the basis of reliable trade information and don't waste time and energy on high-risk debtors. And thanks to its expertise, the factoring company will also be able to act more quickly to stop any attempts at fraud.
If you also opt for cover for the risk of non-payment, you can obtain up to 100% cover for default. In this way you avoid cash-flow problems due to unpaid invoices and protect your investment in your company. Because the factoring company pays you the compensation after a pre-arranged deadline, you can have more reliable cash planning.
You free up more working capital
Debtors tend to pay their invoices more quickly to a factoring company than directly to the supplier. As a result, the average "days sales outstanding" (DSO) of your receivables is lower, which means your company needs less additional financing and therefore makes a direct saving on interest.
What's more, you collect payment more quickly without putting pressure on your debtors or tightening up your payment terms, which is always delicate in a commercial relationship.
If you also receive advances on your invoices from the factoring company, you avoid pressure on your cash flow. That is because your financing is linked to your turnover, so you can always cover any extra requirement for working capital based on your receivables.
You have a stronger negotiating position due to better ratios
Under certain circumstances, factoring products with risk cover make it possible for you to work off-balance-sheet. This means your balance sheet is more concise, your net debt is reduced, and your company's liquidity and solvency ratios improve. As well as having a positive impact on the cost of service from your bank, this also influences your suppliers, major debtors and credit insurance companies when assessing their risks.
You can keep close track of your debtors
Thanks to the online monitoring and reporting, you can keep up to date with changes in your receivables portfolio. For instance, you can consult information on outstanding invoices, credit notes, payments and disputes at any time and you know the exact state of your cash flow.
And for your debtors?
- Thanks to the intervention of the factoring company, you have more certainty of payment, which means you can offer your debtors longer payment terms.
- With every collection, the factoring company provides your debtor with clear reports, so that it is easy for them to keep a track of their payments.
- Foreign debtors don't have to provide supplementary guarantees.
Factoring: what about the risks?
By outsourcing your billing, you can save a lot of time, energy and resources. But what about the risk?
That depends on the agreement you have entered into with the factoring company:
- With non-recourse factoring, you assign the risk of non-payment of the invoices to the factoring company. This means provision of cover for non-payment up to 100% of the amount of the receivable, but within predefined limits.
- With recourse factoring, your company bears the risk of non-payment of invoices. If the factoring company doesn't manage to obtain payment from a debtor after a certain time and repeated reminders, it will claim the amount concerned from you.
In that case, you will have to try to obtain payment of the outstanding amount from the debtor concerned through judicial collection. You can call upon the services of a bailiff or collection agency for this, but most factoring companies also offer this service.
In its risk assessment and pricing, the factoring company will of course also take account of the quality of the receivables portfolio.
Cross-border factoring: better risk management
If you do business abroad, and particularly if you export, it is also advisable to transfer the monitoring, risk cover and funding of your foreign receivables to a factoring company. Why choose cross-border factoring?
- Default cover, since it is not always easy to assess a foreign debtor's creditworthiness.
- Legislation and trading practices regarding billing can vary considerably from one country to another. If you handle collection yourself from Belgium, lack of knowledge of local practices could cause problems.
- Better risk management. If your foreign debtor goes bankrupt, the local branch of your factoring company has a stronger legal basis to collect any outstanding invoices.
The actual services offered by the factoring company depend on how your company operates.
- You export and bill your foreign debtors yourself
In that case, the factoring company can collect and monitor receivables in most countries and provide funding and cover. This is done through a network of affiliated companies or correspondent factoring companies.
- You issue invoices through your foreign subsidiaries
In that case, the factoring company will offer your various subsidiaries a factoring agreement through own its local units. That means your local staff can call on the services of local experts, using their own language and in accordance with local trading practices.