How Do You Know Your Clients Won’t Leave You with Unpaid Invoices?
If you’re worried your clients won’t pay their unpaid invoices due to COVID-19 and the residual economic ripples, you’re not alone. In an era where 55 percent of “temporary” small business closures have become permanent, according to Business Insider, and business bankruptcies are skyrocketing 26 percent per Wall Street Journal reports, it’s clear businesses are struggling with cash flow problems.
Banks and financing companies are all too aware of this. Sometime around April, roughly one in four consumers saw their credit card limits slashed or accounts closed unexpectedly, according to LendingTree. The Federal Reserve’s most recent survey paints a grim picture too, saying banks are raising the requirements to get loans; better credit and increased collateral are the new standards. “Major net shares of banks that reported reasons for tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so,” the report reads.
Your Clients May Leave You with Unpaid Invoices
The risk is real. Seemingly solid, good-paying companies are turning delinquent overnight, and if you’re invoicing clients after you’ve provided them with services or goods, you are extending them credit too, though typically not with the same protections banks and financing companies secure for themselves. Preliminary findings from B2B AI platform Sidetrade show a 23 percent hike in delinquency in the U.K., 52 percent in France, and more than 80 percent in Italy. Numbers for the U.S. have not been released, but unofficial reports indicate the problem is growing across America too. Analysts at McKinsey predict delinquency may grow to three times their current levels by 2022.
Are Unpaid Invoices Tax Deductible?
Sometimes people hope their unpaid invoices will help them out come tax time. Companies that practice accrual accounting, meaning they record expenses and revenue when the transaction occurs, can usually deduct unpaid invoices as a bad expense when they file the next year. However, businesses that use a cash-basis method, meaning they log expenses and revenue when cash changes hands, cannot deduct them from taxes since the payment was never recorded as part of their income to begin with.
Should You Continue Working for a Non-Paying Client?
When someone owes you a balance and they’re not making good on it, it’s ill-advised to continue working for them. However, when the balance is paid, it’s a matter of personal choice. Just be sure to address the loopholes that enabled them to become delinquent before resuming work.
Going to Court is Sometimes a Viable Option
Naturally, most businesses try to work with a delinquent payer through debt collectors before taking legal action. However, when it becomes clear the money isn’t likely to materialize, businesses may have little choice but to retain a lawyer.
Determine if going to court is worthwhile.
In the initial stages, an attorney may be able to draft a letter on your behalf to get the wheels turning. That can help if the customer is prioritizing payments and struggling, though it’s rarely worth the expense if the invoice amount is lower. Going to court can also work too, but most states set a minimum for small claims court—typically around $2,000—so it’s not normally suited to smaller invoices.
Apply New Strategies for Non-Paying Customers
Keeping your emotions in check and maintaining good records are practices to continue, but you can reduce the risk of delinquency and maintain strong business relationships by exploring new strategies too.
1. Make sure you followed procedure and then follow-up politely.
Literally every business is in crisis these days and emotions are running high. Particularly as businesses cope with shifting priorities, it’s easy to overlook an invoice. It would be understandable if someone on your team made an invoicing error too. If you notice an account has become delinquent, take a look through their history to ensure all billing protocol was followed on your end. Then, reach out to the customer with a gentle reminder or nudge to let them know they’re overdue.
2. Give discounts on unpaid invoices and charge a penalty.
Discounts on unpaid bills are a positive way to motivate people to pay on time or early. A reasonable late fee or interest fee is acceptable too. Be sure your policies clearly state that you’ll be doing this and include mentions of it on your invoices as well as on any billing correspondence.
3. Abandon the stiff business approach.
Ensuring “continuity and compassion in customer assistance” is paramount going forward, say McKinsey analysts. They anticipate customer service needs growing and recommend increasing customer service channels as well as customer care associates to keep things running smoothly. However, you may want to consider giving more flexibility than normal. For example, if you have a great client who has always been a good payer and they’re a bit late, it’s ok to waive their fee to maintain the relationship. You may also want to explore things like extended terms if you can afford to do so.
4. Consider collections, arbitration, mediation, and court.
The legal system is still a viable option for delinquent payers but bear in mind the courts are inundated with issues surrounding late payments courtesy of COVID-19’s ripple effect. It may be better to save this as a final step after all other options have been exhausted.
5. Factor your outstanding invoices.
An invoice factoring service can free you from the entire collections process and give you the working capital you need right now. It involves selling your overdue invoices to a factoring company. Each works differently, but you can generally expect a lump sum upfront that covers most of the outstanding balance. From there, the factoring company handles the collection process and sends you any remaining cash minus a nominal fee when the customer pays. Factoring companies look into the creditworthiness of the customers before accepting unpaid invoices, which provides assurance they’ll pay.
Get Started with Invoice Factoring
For more than 20 years, Charter Capital has been helping businesses grow stronger through invoice factoring. With same-day funding, low rates, and flexible terms that allow you to factor on an as-needed basis, we can help you too. Get started with a complementary invoice factoring rate quote.
Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.