Unpaid invoices cause unnecessary effort and can destabilize a business. Late payments erode liquidity reserves, making it critical to avoid payment defaults. Learn how to minimize risks and optimize your risk management strategies.
All businesses face the challenge of late-paying customers. Whether it's due to overlooked invoices, poor payment discipline, temporary financial difficulties, or insolvency, these situations can arise.
For creditors, a payment default means more than the additional effort of reminders and debt collection. The resulting loss of liquidity can also lead to significant financial strain for the company.
The domino effect of payment defaults
According to Coface data, payment defaults are the root cause of roughly a quarter of all insolvencies. Why? Each payment default has a lasting negative impact on a company's financial health.
When a payment is missed, the funds are unavailable to the business, forcing it to dip into its reserves. Once those reserves are exhausted, the company may face severe financial challenges. In cases where a major client suddenly defaults, the situation can even become existentially threatening.
Additionally, to bridge the financial gap caused by a payment default, the company often needs to generate multiple times the amount of the default in new revenue.
Example: A company with an average net margin of 5% experiences a payment default of 15,000 CHF. To offset this loss, the company would need to secure new orders worth 20 times the default amount—300,000 CHF—at the current net margin.
Important: This calculation assumes an ideal scenario where all new customers pay their invoices in full and on time.
5 tips to avoid payment defaults
While payment defaults can never be completely eliminated, these five tips can help you mitigate risks and cushion the impact.
1) Regularly check the creditworthiness and payment behavior of business partners
Before signing the first contract, performing a detailed check of potential business partners should be part of your standard process.
Even in long-term, successful partnerships, it’s wise to keep an eye on your clients. Trust and control can coexist. This ensures greater security and enables you to react promptly if warning signs emerge.
Up-to-date credit information and insights into a customer’s historical payment behavior are invaluable. However, collecting this data can be challenging.
Specialized providers like Coface offer valuable support in this area. With access to relevant data and local experts in key markets worldwide, they deliver quick and precise risk assessments of your business partners.
Coface Business Information
Coface analyzes business information globally by combining publicly available data with exclusive insights from over 700 local Coface experts in key markets. This provides an optimal foundation for your decision-making.
Learn more about Coface Business Information.
Companies like GEODIS, a logistics firm with operations in over 160 countries, and CHS Inc., a global leader in the agriculture sector, rely on Coface Business Intelligence for the information they need to succeed internationally.
Read how Coface Business Information helps CHS Inc. make faster and better business decisions.
2) Secure outstanding receivables with Trade Credit Insurance
Do you have invoices where a default would severely impact your business? If so, trade credit insurance is an effective way to protect your company against payment defaults. This applies to both one-time high-value invoices and ongoing relationships with specific customers.
Trade credit insurance ensures quick compensation in the event of a default. Moreover, securing your receivables improves your credit rating and helps you negotiate better terms with your bank. With trade credit insurance, your liquidity is safeguarded, reducing the risk for financial institutions.
Coface Trade Credit Insurance
No matter your company’s size or industry, Coface trade credit insurance protects your B2B transactions against payment defaults. Tailored to your specific business needs.
Learn more about Coface trade credit insurance.
3) Adapt invoicing to payment behavior
Does a customer repeatedly pay late? Then adjust your contractual terms accordingly. For instance, require upfront payments or split payments based on project milestones. This reduces the risk of facing a complete payment default.
You can also reduce risk with incentives, such as offering discounts for immediate payment of invoices.
4) Utilize professional Debt Collection services
Is a payment still overdue after a reminder and follow-up?
For domestic customers, you can initiate legal collection procedures. If the debt remains unpaid, further legal action may be required.
Alternatively, you can engage a debt collection agency to recover the money. These agencies handle the entire process and transfer the funds to you upon successful collection.
For international debts, specialized collection agencies are often the best solution. These firms understand local conditions and legal frameworks, allowing them to carry out effective collection efforts in foreign markets.
This increases your chances of recovering at least part of the outstanding amount. Additionally, you can stay focused on your core business without dealing with the complexities of debt management.
Coface Debt Collection
Recover outstanding invoices worldwide easily with Coface’s professional debt management services. Save time and effort while receiving your money faster.
Explore Coface’s international debt collection services.
5) Set high standards for business partners
Reliable and trustworthy business partners are hard to find. This makes it essential to identify the right partners and exclude those with poor payment discipline.
The best approach is to establish clear benchmarks for payment behavior. This helps you regularly review your current partners, adjust payment terms if their behavior deteriorates, and select new, dependable partners more effectively.
With services like Coface Business Information, you always have access to the latest data on your partners' payment behavior, saving you the effort of gathering and analyzing the information yourself.