Defaulters can have a major impact on a company’s financial well-being. Therefore, it is very important to prevent defaults. In this article, we will discuss five steps that can be taken to prevent default.
1. How do you determine a customer’s ability to pay?
Before doing business with a customer, it is important to determine their payment capacity. This way, you avoid doing business with a customer who ultimately cannot meet his payment obligations. To determine the payment capacity, you can, for instance, have a creditworthiness check carried out by a specialised company. Based on this check, you can determine whether it is wise to do business with this customer and what the possible risks are.
2. How do you draw up realistic payment terms?
It is important to set realistic payment terms to avoid customers running into problems paying their invoices. To do this, it is important to look at the customer’s payment history, payment capacity and payment preferences. For example, you can agree that payment can be made in installments, or that payment must be made within a certain period of time after receiving the invoice.
3. How do you monitor compliance with payment agreements?
It is very important to properly monitor compliance with payment agreements. For example, you can send a reminder when the payment term expires or send a payment reminder if payment is not made on time. In this regard, it is important to have a good system for tracking payments and reminders. If there is already a defaulter, it is important to know how to handle a defaulter.
4. Debtor management to prevent default
To avoid default, it is important to have good debtor management. This means having a good overview of outstanding invoices and taking timely action if they are not paid on time. For instance, you can agree on a payment schedule or engage a collection agency if payment is not made. Debtor management also includes sending reminders and dunning letters. You can also choose to outsource debtor management.
5. Use factoring against defaulters
Another way to avoid non-payment is to use factoring. Here, you hand over the invoices to a factoring company, which then takes over the default risk and pays the invoices quickly. This way, you don’t have to wait for payment deadlines and have instant cash flow. In addition, you don’t have to worry about non-payment as the factoring company bears the risk.