If you’re a business that sends invoices, it’s inevitable that you will encounter past-due accounts at some point. If you end up encountering invoices that go past their due date, it’s almost a certainty that some of these will end up going to a collection agency or getting written off completely.
We’re two business owners that founded a business services company in 2009. Since then, we’ve sent thousands and thousands of invoices and have had to deal with the problems of chasing late accounts. So much so that we developed a SaaS company that focuses on automating part of the accounts receivable function that deals with getting invoices paid.
We welcome you to learn from our experience with this guide that will break down the many aspects of past due accounts and how to deal with them.
This guide is intended for B2B and B2C business owners and finance team members involved in accounts payable, accounts receivable, invoicing, and collections. Enjoy!
- Why past due accounts are bad for business
- Protect yourself early and try to avoid past due accounts in the first place
- How to best use AR automation tools
- Collection method best practices
- Recourses, late fees, and when to send a debt to a collection agency or law firm
- About HappyAR
What Does Past Due Mean?
The definition of past due refers to a payment that has not been made by its cutoff time at the end of its due date. While percentages vary for different industries and company sizes, the general U.S. benchmark for past due invoices is around the 50% mark.
Why Past Due Accounts are Bad for Business
- Late payments disrupt your cash flow which can negatively impact your ability to invest in growth initiatives, pay your expenses and vendors, and qualify for borrowing. The list of damaging effects of late payments and write-offs is considerable especially if you’re a company that pays on time and cares about the financial health of your organization and how investors and banks may view it.
- Past due invoices can have a damaging effect on relationships with clients. Disorganized follow-up attempts, threatening language, and collections processes that aren’t compliant for B2C customers can all hurt your business for years even though the debt isn’t your fault!
- If sales commissions are impacted by accounts receivables, your reps may lose motivation and question what’s holding up their commissions. You run the risk of losing your best team members that may start looking elsewhere if they view AR collections as soft.
- Chasing a past due balance takes a lot of time and effort. If you aren’t automating this work, you’re either doing it yourself or wasting money for staff to perform repetitive tasks.
Protect Yourself Early and Try to Avoid Past Due Accounts in the First Place
There are plenty of actions you can take to greatly reduce the number of past-due accounts you have to address.
- If you’re still sending invoices the old-fashioned way with a PDF attachment or worse, through the mail in a paper format, you’re inviting the worst out of your customers. Invest in an invoicing system, preferably one that ties into your accounting software. Most of the bigger companies have this functionality built-in, so use it!
- Clearly spell out your terms and conditions for payments in your statements of work, sales contracts, and especially invoices. Your clients deserve to know your terms and conditions for accounts receivables. If they ask you to adjust specific items like net payment days, consider what you’re comfortable with, but clearly spell out how you handle collections, late payment fees, and when you send debts to collection agencies.
- For B2B relationships, connect with an accounts payable contacts very early in the process. Get their name email address and reach out to introduce yourself. Send a connection request on LinkedIn. Make sure you have their direct phone line. If you are working with a large client that has an AP department, just get as much contact information that you can. Trust us, you might need this later to connect with this team frequently and you don’t want to start looking for it after you know there’s a problem.
- For B2C customers, make sure you have the information you would need to send them to a collection agency or to credit bureaus.
How to Best Use AR Automation Tools
We mentioned invoicing systems in the previous section and how they can prevent a past-due bill in the first place. We’re obviously very big fans of AR automation and have made it our company mission to develop technology that gets your invoices paid faster.
Make sure that you’re getting the most out of AR automation tools or manual processes with the following tips:
- Give your clients multiple payment options. Take the friction out of the payment process by accepting all credit cards, ACH, PayPal, wire payments, etc. Have options for one-time charges and payment arrangements. Provide super easy instructions on all correspondence and documents.
- If you are going to provide an early payment discount then make it compelling, clearly spell it out, and make sure it’s honored. If the cut-off is five days for the payment to be in your account, don’t offer the discount if it’s later than that.
- Define your tone and create follow-up copy that can be used by members of your team without extensive training. For the tone, we like to keep things professionally persistent. Being aggressive and demanding will often backfire. Being passive will lower the priority of paying you. Make sure they know that prompt payment is critical for your business and that you are organized and will be staying on top of them for updates and payment timelines. Just don’t lose your cool!
- With AR automation tools like HappyAR, you get visibility into when your electronic correspondence is opened. If you see that it’s not, keep in mind that it may have landed in a SPAM folder. Use a SPAM copy checker online to write your follow-up copy and keep in mind that a lot of finance language gets flagged. Don’t be shocked when you aren’t paid on time if the invoice was never seen in the first place and use your AR automation to set yourself phone call reminders and LinkedIn touches.
Collection method best practices
- Be organized and diligent. “The squeaky wheel gets the grease” is certainly true in AR collections. Stay cool but be active. If you aren’t using AR automation, create reminders for following up on the due date and every few days after depending on how the client replies.
- Offer options if needed. Monthly payment plans should only be used if there’s a known reason for delinquency. Insist on answers! “The check was sent” should be followed with “Can you tell me on which day, the check number, and the delivery method?” and “Will you confirm the address to which it was sent?”.
- Escalate the request to someone higher up. Call the CFO and explain the situation. This person may not be the one that cuts your check, but you’ll almost always find that they were unaware of the late payment and will call the AP person to pay right away.
- Keep an audit trail! Record all correspondence by date. Archive all email attempts and responses. AR Automation tools like HappyAR provide a fully exportable audit on demand.
Recourses, Late Fees, and When to Send a Debt to a Collection Agency or Law Firm
- As mentioned in a previous section, your recourses, late fees, interest rates on the due amount, and escalation to a credit bureau (for B2C debt) or collections agency should be fully spelled out in advance and communicated to your client after an appropriate grace period has passed.
- We typically won’t start talking about these things until 30 days past due. Any sooner will be perceived as a threat and can backfire instead of accelerating a payment.
- Before you start mentioning credit reporting, make sure you’re fully educated on debt collection compliance, especially when speaking with consumers. Creditor laws change frequently, and you want to keep yourself and your business safe. Suggesting to a customer that their credit score will be negatively impacted can be an effective collection method, but know what you're talking about and the rules.
- Shop your debt around to different agencies and choose one with experience in your industry. Keep in mind that many B2B collections companies will reject debts under $5,000.
- You’re going to give up a significant portion of your debt to the agency so make this the last option before a charge off. Unfortunately, not all agencies are alike. You should check in on progress periodically. We have experienced problems where an agency didn’t bother to make calls to the client and the issue was delayed and never resolved. Find an agency that wants to earn your trust and partner with you for the long run.
About HappyAR
HappyAR is a seamless SaaS that quickly and easily boosts your accounts receivables work.
We save companies of all sizes thousands of dollars each year by optimizing the speed and efficiency of their collections methods. No more guessing if someone has received an invoice or trusting that it will be paid on time. This is a fully integrated solution that pays for itself over and over each month by preventing defaults and preserving client relationships.
HappyAR is an ever-evolving toolkit that helps optimize your invoice collections process and our solution starts at $0/month and scales up based on your invoice volume. Visit us at www.happyar.com to learn more.