Why Collecting Payments Starts With Better Invoices

Cash is the lifeblood of a business, meaning that delayed payments delay growth.

Payment defaults are even worse.

Today’s turbulent macroclimate has only underscored the importance of keeping cash on hand for businesses — complicating the buyer and seller dynamic by adding more pressure around one party wanting to collect as fast as possible, while the other is frequently trying to extend that time wherever and however possible.

In extreme cases, certain parties may go so far as to not pay their bills or invoices at all.

“Small and medium-sized businesses [SMBs] are often inefficient at collecting money, and sometimes fail to collect at all,” Jeremy Crane, founder of debt collection marketplace Retrievables.com, tells PYMNTS.

He adds that recently he spoke to a small construction company in the U.S. that was owed $40,000 and “hadn’t done anything about it.”

PYMNTS research in the new “Main Street Health Q1 2023: Using Finance to Ease Recession Fears,” a collaboration with Enigma, reveals that many SMBs would be unable to continue operating for long if their cash flows were disrupted.

The ongoing challenges of the economy make it critical for SMBs to ensure they aren’t being taken advantage of by their buyers, and that they take the necessary steps to follow up on unpaid invoices.

See Also: European Regulators Turn Up Heat on Late Payment Fees to Protect Small Businesses

Missed Payments Can Be Deadly

The smallest Main Street SMBs are at the most at risk of closure in the event of a cash flow shortfall, such as a relied-upon payment not being made.

Whereas larger firms may have correspondingly greater capital reserves and more efficient credit lines to iron out the fluctuations in cash flow that late or delinquent payments create, SMBs rarely enjoy that privilege.

“It really comes down to leverage,” Bob Purcell, CFO of B2B digital payments platform Billtrust, told PYMNTS in a recent discussion. “Everyone is trying to leverage their situation: The buyers want to pay when they want to pay, how they want to pay, and the suppliers want to collect as quickly as possible.”

PYMNTS data finds that nearly three-quarters of SMBs (74%) don’t have access to the equivalent of around two months’ worth of revenue in financing, while 17% have no access to emergency funds at all.

“The best way to collect money is by utilizing the services of a collection law firm — they can leverage the tools of the judicial system, whereas other efforts are limited mostly to outreach calls, emails and letters,” Retrievables.com’s Crane says.

He emphasizes that the economic headwinds have led to more missed collections and skipped-out-on payments.

Read more: Embedded Invoice Financing Bridges Cash Flow Gap for EU Freelancers, SMBs

“There are more B2B collections out there as a result of the economy,” Crane says, adding that certain collections are more difficult to call upon than others given that certain debtors may have gone out of business themselves — making them less able, and much less likely, to pay their outstanding invoices, at least without a judge nudging them.

Crane adds that there are three main reasons why a business may not pay its bills.

“First is the classic business that is struggling or bankrupt — and if it’s bankrupt, the collection attorney can’t do anything about that. The second is a business that might not be satisfied with the service that was provided, they believe what they got wasn’t what they signed up for and they aren’t going to pay for it,” he explains.

The last, Crane says, are just dishonest people who, for whatever reason, never pay their bills.

As for where SMBs need to be most wary about delinquent B2B clientele?

Crane says that the industries where collections can have the greatest impact include construction, trucking, manufacturing, the IT sector, software companies and developers, and cannabis.

“When you file a lawsuit with someone, you understand that you’re losing a customer,” he adds, noting that there are companies that “don’t want to get a reputation for taking people to court, so they won’t do it.”

Still, on the flip side, Crane says, “You won’t want to get a reputation for not collecting money.”