The Covid-19 pandemic posed numerous challenges not only to people, but to numerous companies and business sectors in the Bulgarian economy as well. Whole business sectors were forced to reduce their working capacity for months, which lead to a chain reaction and increase in the intercompany indebtedness in the Bulgarian economy. And this has most quickly affected the SME segment. A survey of the Receivables Management Association has shown that B2B receivables assigned to professional collection agencies have risen with about a fifth to 9.356 million BGN in 2020 compared to 7.806 million BGN in 2019.
What practical steps can small and medium sized companies take in order to limit the late payments of their clients – the experts of the Receivables Management Association share their advice below.
- Detailed pre-screening of the business partners: companies, which handle their receivables better, take proactive and preventive measures even before starting their business relationship with potential partners. They would carry out a preliminary checkup of their clients‘ solvency, prepare immaculate documentation related to the deals, and perform regular monitoring of their clients throughout their partnership. It is important to note that a simple checkup of the company on the Internet is not a reliable source of information in this respect. It is best if a credit report on the company or references from their other clients are obtained.
- Payment terms management: various surveys in different countries have shown that granting optimal payment terms to clients is a very good liquidity and working capital management tool. The longer the payment term granted, the higher the probability of delays in payments is and while waiting to receive our money, there is also a higher probability that your own company will find itself in default.
- Taking timely measures: what is important is that if the payment is not received on the day following the invoice payment term, then our client is already in default, which means that our company should take some measures. Tolerating additional delays gives a signal to the client that they may prolong their delay further. The good practices in this direction are that from day 1 of the default we should inform our client that the payment term has passed and we should agree on a payment date.
- Relying on professional expertise: sooner or later after the payment default, the creditor decides to search for external support regarding their defaulting client. Very often companies take direct legal actions, while skipping the important step of working with experts in the receivables management field, which can take over the communication with the defaulting payer. Such companies take the role of a mediator and negotiate with our business partners reasonable payment terms and this relieves our specialists from additional tasks and allows them to focus on their work duties. Working with an external expert sends a clear message to our clients that we are a reputable company, which insists that both parties respect the commitments they have made. Also, another advantage of the collection companies, along with their high specialization in debt collection, is that their remuneration is based on a percentage of the collected amounts. This motivates them to achieve high results while the creditor does not have to pay any advance fees before they have received their money.
Late payments from clients lead to deterioration of the financial health of companies: the main consequences of defaults include decreased profits, higher interest costs and decreased liquidity. That is why it is important to know what measures we can take to improve the financial stability of our business and to contribute to ending intercompany indebtedness.