In the first part of my practical overview (here), I outlined a “proactive” approach to receivables management. In the following second part, I will explain how a company can try to (safely) collect receivables in the event of payment defaults.
Part 2: “What to do if the customer does not pay?
Customer does not pay – and now?
You have done everything according to the textbook – put the customer through his paces before concluding the contract, negotiated fair contract terms for your company and even collected an advance – but now the customer does not pay the (remaining) amount. The first thing is to actually realize that the customer is not paying. Particularly in small companies with a certain “turnover”, small and medium-sized issues are often lost sight of. The plant manufacturer, who only delivers three to four machines a year, is of course less likely to lose sight of this.
If you discover that a customer is not paying, you should be able to fall back on an established “reminder routine” in your company. By no means does this mean that if the payment terms of one of these popular letters (“electronically issued, valid without signature”) are exceeded, it will automatically drop out of the printer, be enveloped and sent. Rather, a process routine should be established in which at least the rough rules are defined from the determination of the untimely payment to the personnel responsibility for the collection of the claim up to the previous definition of the “weapon arsenal” available for the assertion of the claim. For this purpose, it is often sufficient to simply write down the strategies that employees apply to defaulting customers anyway – and then systematise them.
Find out why your customer doesn’t pay. Give him a call. Yes, it feels as pleasant as cold calling, but it is necessary to be at the customer’s pulse. Nothing can harm a trusting relationship for years more than a harsh reminder if the bill simply hasn’t arrived (for example, because it hasn’t been sent, I’ve already experienced it!). Conversely, verbose excuses (“cheque is in the mail”) often say more about the customer’s true condition than he would like to reveal.
If the customer does not pay despite a corresponding verbal address, you have to make a decision: How far do you want to go? I know of successful companies that have even the smallest outstanding debts collected by the courts. But, also I know of successful companies that “let five be straight”. At this point, you won’t find any help in suggestive guidebooks. You must decide for yourself which type of “debt collector” you are or want to be. Only after this decision you should look into the toolbox of professional debt collection.
When making your decision, bear in mind that the involvement of third parties – whether debt collection agencies, lawyers or others – causes costs on the one hand and on the other hand also represents an often irreversible escalation stage. But even a judicial dunning procedure – which can be carried out by the company itself – does not have a real de-escalating effect. As a first – but still relatively mild – stage of escalation, the service of a reminder by a bailiff can also be considered. This is not too expensive and in a later procedure the proof of the receipt of a (further) reminder might come in handy. More importantly, the psychological effect of service by a bailiff should not be underestimated.
But if you – after a lot of back and forth – have made the decision to assert the claim, for example through a lawyer, then it will become clear whether you have followed the previous steps of “proactive receivables management”. If, for example, your contract documentation is not “legally binding” or if there are counterclaims from the contractual partner, then the lawyer commissioned will not be able to enforce the outstanding claim without considerable effort. But even such processes are not in vain – if you manage to incorporate the painful lessons learned into the above-mentioned “reminder routine”.
Customer falls into insolvency – the end?
One of my clients recently had the unpleasant experience of receiving the legal title in court, but still not his money. The defaulting client simply fell into insolvency after the judgement against him. My client was quite right to say that he could hang the title in his toilet. In fact, in view of the average insolvency dividend of only 3.9% (see here, in German), i.e. a payment of 3.9 cents on every euro recognised as a justified claim – and these often only after years – one should not indulge in too many illusions when the corresponding letter from a (provisional) insolvency administrator flutters into one’s mail box.
However, it is possible that the low insolvency rate is still the least of your problems in the event of a customer’s insolvency, namely if the insolvency administrator also tries to claw-back payments made to you via avoidance actions. Such problems usually arise in cases where creditors try to protect their customers from insolvency by deferring payment or similar measures. Even after a reform in 2017 (see more on this here), the Damocles sword of insolvency avoidance hangs over these payments in such cases. Only recently, the German Federal Supreme Court (BGH) has substantiated its case law on the question of whether and to what extent a creditor must know and examine the “restructuring concept” of his debtor (here). We could now lament about the lack of practical relevance of this BGH case law – but it does not change the fact that the granting of payment deferrals without a proper review of the debtor’s situation and the restructuring concept, will always be subject to the risk of insolvency insolveny avoidance.
Conversely, in the event of insolvency shortly after the conclusion of a contract the creditor might raise the point of a so-called “fraud in the inducement”. In other words, whether the debtor perhaps already knew when the contract was concluded that he would not be able to pay the ensuing obligatons. In such a case that the debtor might not only be held criminally liable but also for tort. Particularly in the case of larger claims, action at several levels (i.e. against the company and the managing director) may make sense because reports of ongoing criminal investigations or civil liability risks for any restructuring efforts tend to be counterproductive – and the parties involved may then be more likely to make payments.
“Pro-active” receivables management is necessary – not only in times of economic crisis, because regardless of such a crisis it is very annoying not to be paid for one’s performance. By the way, this also affects the motivation of the employees.
Active receivables management doesn’t start – and this is also a truism – when the customer doesn’t pay, but before signing a contract – keyword: “Know your customer” (KYC). If the customer does not pay despite all precautionary measures in the apron, you must decide as an entrepreneur, how you want to proceed further, either on the “hard tour” or rather “mediatively”.
Last but not least: You will also make a name for yourself in your industry if it is clear that you will collect your receivables – or ensure that a customer who does not pay will not become your customer again.