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What is a Delinquent Payment?
A delinquent payment is a missed or late payment for a financial obligation, such as a loan, credit card bill, or rent. When a payment is delinquent, the borrower or customer has failed to make it on time, which can result in penalties and fees.
Most businesses charge late fees when they don’t receive payments within the agreed-upon time frame. Depending on the nature of the company, their collections process (and the payment terms in place) will vary.
- Credit card companies typically charge customers between 25% and 35% interest when a payment is past due. They also allow a partial payment.
- Marketing agencies generally start the collections process when an invoice is 30 days past due.
- Utility companies may cut off service after two months of non-payment.
- SaaS businesses normally end their services automatically and include a popup on their website and app stating why they’ve done so.
If payments continue to be delinquent, the lender or vendor may take further action, such as reporting it to credit bureaus or taking legal action to collect the debt. This can have a negative impact on the borrower’s credit score and financial standing.
- Delinquent account
- Delinquent debt
- Late payment
- Past due invoice
Causes of Delinquent Accounts
Expired Credit Card
If a customer is unaware the card connected to their account is outdated, they may inadvertently miss a payment. Without billing software to catch this issue and notify them automatically, a business would have no way of managing this.
When there isn’t enough to cover the balance for a payment that’s due, the vendor’s payment processor won’t be able to authorize the transaction.
This could happen if:
- The customer entered incorrect card information
- They used a different card than the one they should have
- Their financial institution declined the transaction due to fraud concerns
- They don’t have enough money in their account
- Multiple large transactions hit their account at once
Forgetfulness or Financial Hardship
Sometimes, something as simple as life’s responsibilities getting in the way can cause someone to forget about making a payment. Others, serious situations like a financial hardship can cause the consumer to fall behind on payments.
Impact of Delinquent Payments on Business Financial Health
Delinquent payments can have serious consequences for both individual borrowers and financial institutions. For individuals, delinquency can negatively impact credit scores, which makes it more difficult to secure loans or credit in the future. It can also result in late fees, increased interest rates, and even legal action from creditors.
For businesses, delinquent payments can lead to a decrease in profits and potential losses. They will also have to allocate resources towards collecting unpaid debts, which takes away from other business operations.
Increased Administrative Costs
When your accounts receivable collections team has to spend more time and resources on dunning management processes like tracking down delinquent payments, it can significantly impact your bottom line. The longer a payment remains delinquent, the more time and effort it takes to collect it.
Lost Revenue and Damaged Customer Relationships
Customers who consistently make late payments are generally more disengaged with the vendor’s product or service (which is why delinquency is one way to identify at-risk customers). Inefficient internal billing processes that cause delinquent debt will also cause customers to develop a negative perception of your business.
Either way, you’ll generally have a higher churn rate if your customers aren’t satisfied with the customer experience.
Cash Flow Problems
Whether or not a delinquent account actually pays off their unpaid debts, lateness creates immediate cash flow problems for the company. This creates difficulties when it comes to meeting financial obligations such as paying bills or making a large investment (e.g., an equipment purchase or round of hiring).
How to Avoid Customer Delinquency
Automated Billing and Payment
Automated billing is far and away the most crucial element of a smooth, efficient payment process. This is especially true if your company uses a recurring revenue model, where billing customers at regular intervals for their product/service usage is impossible.
Billing software handles payment processing, payment reminders, and updates to customer information automatically. It also continuously double-checks your customers’ payment methods are current, reducing the likelihood of a delinquent payment due to an expired credit card.
It also enables customer self-service by integrating with your website, mobile application, or billing portal to provide customers with a way to view, manage, and update their payment methods independently. It also allows them to access their payment history, which enhances transparency and can prevent misunderstandings.
Transparent Payment Terms
If you don’t have a clearly outlined payment policy and a straightforward, user-friendly billing process, your customers will have a difficult time keeping up with payments. In some cases, they might not even know.
To make clear payment terms, there are a few guidelines you should set:
- Put payment terms in writing, whether in a contract, invoice, or formal agreement.
- Be specific about the payment details — the amount due, payment deadlines, accepted payment methods, and any penalties for late payments or incentives for early payments.
- Communicate your payment terms upfront before entering into an agreement or providing services.
- Apply your payment terms consistently across all clients and transactions, except for rare occasions where you’ve specially negotiated different terms (e.g., with long-term clients).
- Establish clear procedures for following up on late payments, including reminder notices and steps to be taken if the payment becomes delinquent.
- Provide a channel for clients to ask questions or raise concerns about payment terms.
Some customers will have differences — for example, payment plans for larger purchases or longer-term clients. But, in general, establishing clear payment terms and procedures will go a long way in preventing customer delinquency (and ensuring customers feel they’re getting a fair deal).
Send Payment Reminders
In your billing software, you can configure automatic payment reminders, which can help reduce the number of delinquent payments your business receives. When a customer’s sign-up or payment due date is approaching, the software will trigger an email or SMS notification reminding them to make their payment.
It’s a non-invasive way to alert customers of upcoming payments, especially for subscription-based services. It also decreases the likelihood of delinquency occurring due to forgetfulness or miscommunication.
Communicate with Customers
Communication is important for two reasons:
- Open communication builds stronger relationships with your customers, which makes them more likely to prioritize paying you on time. They’re also more likely to resolve any issues that might be delaying payment as quickly as possible.
- Keeping in touch with your customers makes spotting potential delinquency early and taking action easier. If you can address a late payment before it becomes a problem, you’ll save time and money (and keep your churn rate low).
As mentioned above, you can automate part of this using a billing platform. But you can also reach out personally with a more personalized message. And you should have a system for building and managing customer relationships, to minimize the chances of them having an outstanding balance.
Involve Account Managers When Necessary
Instead of sending debt to collection accounts or taking other aggressive measures, try having an account manager reach out to the customer first. They’re the ones responsible for managing the customer relationship, and they have better insight into the customer’s payment history and behavior.
If a customer has been actively using your product and making payments on time, but suddenly stops responding or paying, there might be an underlying issue you’re missing. Involving an account manager can help identify and resolve these issues before they become bigger problems. Plus, that means you won’t risk tarnishing the relationship.
Best Practices for Collections on Delinquent Accounts
When dealing with collections on delinquent accounts, it’s important to approach the situation with a blend of firmness, professionalism, and empathy.
Here are some best practices to consider:
- Intervene early. The sooner you act, the better your chances of successful collection. Early reminders can often resolve simple oversights or errors.
- Communicate clearly. Always communicate clearly and professionally. Ensure the debtor understands the amount owed, the missed due date, and any additional fees or interest that may have accrued.
- Document everything. Keep detailed records of all communications and transactions related to the delinquent account.
- Respond with empathy. Be understanding of the debtor’s situation. Financial hardships can happen, and showing empathy can facilitate cooperation. Offer to work with them to find a solution, such as a payment plan.
- Be open to negotiating payment plans. Allowing the debtor to pay in installments can be more effective than demanding a lump sum they might not be able to afford.
- Know the laws. Familiarize yourself with the laws governing debt collection in your area. This includes understanding what actions are permissible and what constitutes harassment or illegal practices.
- If internal collection efforts fail, consider using a third-party collection agency. Ensure the agency is reputable and follows ethical collection practices.
- Inform the debtor if the debt will be reported to credit bureaus. Sometimes, the potential impact on their credit score can motivate payment.
- Use legal action as a last resort. However, consider the cost and the likelihood of recovery before proceeding.
- Ensure your collections team is well-trained. They should be aware of your business’s policies and legal requirements for debt collection.
People Also Ask
What is the best way to handle accounts that are not paid after 90 days?
The best way to handle accounts a customer hasn’t paid after 90 days is to follow a consistent collections process. Use your billing platform to send automated reminders, and have an account manager reach out personally after 30 days. After 90, consider involving a third-party collection agency or taking legal action as a last resort.
How do I get clients to pay overdue invoices?
To get clients to pay overdue invoices, first ensure that your payment terms and procedures are clearly established. Communicate regularly with customers, and consider offering payment plans for larger or long-term clients. Use your billing software to send automated payment reminders before the due date.