24% is the new proportion of unpaid invoices between companies in France according to the latest Side Trade study for BFM Business, this is a 4 points increase over the past 12 months. This worrying increase in trade receivables is leading the finance functions to boost their creativity to reduce their DSO and collect their debts quicker.
Several reasons can explain a debt. A commercial dispute, a misunderstanding or low quality of the invoice, sometimes a simple forgetting to pay. In times of crisis, it is the lack of cash that is increasingly blamed. Setting up a payment plan can be very useful to resolve such situation amicably, and therefore preserve the commercial relationship with your client.
In which case and to whom can a payment plan be proposed? What implementation conditions shall be met for a quick debt recovery? Let’s have a look on it.
The payment schedule: an arrangement that can pay
When a customer no longer pays your invoices because of its cash flow concerns, the payment plan is a very effective out-of-court solution.
The payment plan advantages:
• It often avoids recourse to a legal process which can sometimes be long, expensive, difficult to set up and with uncertain outcomes.
• It preserves the commercial relationship you have built with your client, and even strengthens your bonds of trust. Any business can run into cash flow problems, especially during the current COVID-19 crisis time. If you listen carefully to your debtor, understand the difficulties they face, they’ll be happy to accept your proposal to help them pay, and they’ll be more likely to stick with you as business partners for the long haul.
• The payment plan even can even speed up cash collections. If the terms of the new deadlines seem fair and realistic to your debtor, you will have a better chance of getting your money back than if you force your debtor to pay your invoice immediately and for its full amount or go into legal proceedings right away. The legal process could indeed hold up your debtor back , he may even be tempted to make it more difficult for you, or organize his insolvency to stop the debt collection process against him.
• The payment plan constitutes a debt acknowledgment. The debt will no longer be disputable and this document (if signed of course), will be useful to you in the event of legal action.
However, you need to be careful, all the benefits of this amicable collection method listed above are to be in line with the debtor’s profile, his financial health, the exact context and trend of his business, as well as with the commercial relationship that you have been able to build together.
How to successfully set up a payment schedule?
After evaluating the viability of this solution to collect your unpaid debts out of court (amicably), you should be able to assess your debtor's repayment capacities and his exact situation.
A good payment plan takes into account both the debtor's difficulties and the creditor's interests
A realistic plan must take into account both the financial capacity of your debtor, his overall business situation, the nature and strength of your business relationship as well as your own interests.
There is no point in setting up a payment plan with deadlines that are too close or too high if your debtor cannot meet them. The arrangement would be doomed to failure.
However, the payment plan should be as short as possible to protect your own business cash flows. You should also include late payment interests and/or penalties, to compensate for the extra time that is granted to your debtor.
It's all about balance.
Evaluate as accurately as possible the financial capacities and the economic situation of your debtor client
You can get information directly from your debtor. In addition, you can order a commercial information (credit report, solvency, etc.) or use the financial online databases which constitute a significant element of reinsurance and which can guide you to set the appropriate credit line with all your clients.
So, you will be able to negotiate the terms of repayment (duration, frequency and method of payment, due amount, late payment penalties/interests…) more calmly.
Our advice to ensure the success of this amicable solution
• Ask your debtor for an immediate upfront payment as an evidence of his good faith and as soon as the payment schedule is in place, always according to the financial capacities of your debtor customer.
• Make your own position stronger with a transactional protocol signed by both parties setting out the terms of the agrred payment plan : this document will be a proper debt acknowledgment in the event of legal proceedings and if your detbor fails to respect the payment plan (new contract).
• Add a clause providing for the lapse of the transactional agreement in the event of non-payment of one single deadline of the payment plan: compliance with the dates is just as important as that of the amounts, especially if the agreement involves a partial waiver of debt. If, for example, the amount of the debt is € 12,000 but the agreement is made on € 10,000 with a waiver of € 2,000, in the event of non-compliance by your debtor, the agreement is rendered null and void and the legal proceedings may well relate to the entire original amount of the debt, i.e. € 12,000, plus all late payment interests and penalties.
• Track payment progress closely and keep your debtor involved just as much as you need to be. At the slightest incident, you will need to be responsive and consider legal recovery.
Did the payment plan not result in the collection of your receivables ?
If, despite your efforts and attempts at amicable conciliation, you have not been able to get paid from your client, you still have a few resources to use.
In this case, it may be advisable to use a debt collection partner. Debt collection is a profession in its own right and the professionals in charge of collecting unpaid debts are true experts with multiple skills who are committed to preserving the commercial relationship between the creditor and his debtor. Listening, sharing, empathizing, using interpersonal communication and negotiation skills, these are some of the capabilities that allow the debt collection company to recover the unpaid debts with ethics and respect for your debtors, most of whom will be again good customers to your business.
Would you like to know more about our debt collection solutions? Contact us.