Managing the Risk of Nonpayment for Your Appraisal Business Any time there is an exchange of goods and services, there is risk involved. Risk can happen at any point in an experience, even when you’ve tried to prepare or anticipate it.
When you, as a business or individual, ask someone to pay you–even if it is money that is clearly, unequivocally owed to you, you acknowledge that collecting that debt may present an issue. This is amplified by your need to pay for business expenses, salaries, etc. Fortunately, there are some easy ways to manage or even prevent nonpayment scenarios.
Sounds too good to be true? Read on!
Identifying risks early on
The best way to deal with nonpayment is to prevent it entirely. If someone frequently changes their payment methods, they may present a higher risk than those who are consistent with their payment method. If they have a history of breaking contracts, are hard to get ahold of, or exist in a market you know to be tumultuous, they present a higher risk.
But knowing that something may be a risk is easier than approaching it in a professional way that reflects positively on your business.
Fortunately, when you work with a factoring company such as Sekady Capital, a potential business partner’s risk profile is assessed by the factoring company, assessing their likelihood to pay and saving you the considerable hassle. Throughout this article, we will discuss scenarios both with and without a factor in place.
A quick definition
If you’re unfamiliar with factoring, we’ve got a ton of great resources on the blog to help offer a thorough definition. Factoring simply means that you sell your invoices to a factor and, for a small fee, they do the work of collecting the money. You get cash for them as soon as the next day, and the factor seeks payment from the client, handling any issues that may arise.
The results of nonpayment
We obviously expect to be paid for the goods and services we provide, but what can happen when people don’t pay? Sure, there are legal avenues that likely result in the eventual recovery of your money, but that can take weeks, months, or even years. In a perfect world, this wouldn’t be a problem, but for most business owners, cash in hand is significantly better, in order to handle business expenses like rent or a mortgage and employee salary.
If you’re selling your invoices to a factoring company, you turn this risk over to them. They’re large enough to be equipped to pursue payment, leaving you (the small business owner) with the cash you need while they seek the paid invoice. How such disputes are handled depends largely upon the factoring company that you partner with. At Sekady, we not only vet the customer via preliminary credit checks to help prevent nonpayment but handle collections calls in the event that nonpayment occurs.
How to mitigate known nonpayment risks
Counteracting potential risks in these situations can be difficult, in part because you don’t actually know that the risk will turn into a problem. To mitigate these situations, be proactive in your communication, be as careful as you can be about who you choose to work with, and be prompt in asking for or checking in on payment. If you’ve worked with someone in the past who was slow to pay, it may be wise to avoid doing business with them again.
You should also gain a preemptive understanding of possible legal opportunities and outcomes for seeking payment in the event that someone defaults on an invoice. Having the information ready to go can help establish your expertise, which is sometimes enough to get people to deliver prompt payment without the added hassle of default.
In the earliest stages of project work, you can help prevent nonpayment by drafting and enforcing a well-written legal contract, which can give you a clearer path forward in the event that someone defaults on an invoice. Establishing clear parameters and seeking the advice of a legal expert ensures that your contract is able to provide this necessary service.
In addition to credit checks and credit monitoring, there are some relatively easy ways you can assess customer nonpayment risk. Your best bet is usually to invoice early and often, providing clients with a variety of payment options that offer ease of use and security. Establish clear terms of payments, outlining any penalties for late-payments and other payment scenarios.
Set yourself up for success by collecting numerous ways to contact them, and maintain a relationship so that they’re more likely to pay in a timely way. Part of this process might also include service phone calls before billing happens, since customers who have expressed satisfaction should, at least in theory, have no reason not to pay. You may also need to mitigate risks by adjusting the amount of credit you’re willing to offer folks who may fall into a higher risk category, although this can quickly become complicated.
If this sounds like a lot of work, that’s because it is. For many business owners, mitigating risks at this level provides a significant obstacle, requiring extra time, staff, and planning to execute. For many, outsourcing these tasks makes the most financial and business sense, especially when you can accomplish it for a low cost.
What to do when a customer won’t pay
If you’re managing invoicing on your own, you’re responsible for handling non-paying customers. Your first step should be to review your payment terms and contract details, try to offer a payment plan if you’re able (which can also be risky), or even consider lowering the bill–a less than ideal option. If this doesn’t result in payment, you may need to head to a small claims court and work with a business reporting bureau. The process isn’t pretty, but it can be necessary in order to receive payment.
Gaining an advantage
Perhaps the single biggest step you can take to reduce the risk of nonpayment is to partner with an invoice factoring company. Factoring your invoices can:
- Get your money as soon as the next business day
- Offer flexibility, allowing you to pick and choose the customers, or even the individual invoices to factor
- Provide an inexpensive solution to address labor shortages in billing departments
- Grow your business with your cash in hand
- Reduce your back-office paperwork
- Eliminate collection calls
Working with a factoring company is an essential step in risk mitigation since they generally run a credit check on customers and manage invoices throughout the payment process. But how do you find the right partner for your needs?
Choosing the right partner
Just as you wouldn’t enter into any kind of relationship without getting to know the other party, you should never begin a business relationship with the first partner that feels convenient. Careful research, analysis, and conversation should accompany your decision-making process. Finding the right factoring company to meet your needs doesn’t have to take a lot of time, but it should be a mindful process that results in an excellent partnership.
- Industry expertise. Finding a company that is an expert in your particular field is a great place to begin your search for the perfect partner. They’ll know the ins and outs of your business and have an excellent handle on your specific customers. True Industry experts streamline the process on both your end and your customers.
- Good customer service. A factoring company should be easy to reach, quick to respond, and dedicated to helping solve your problems. Look for someone who can quickly answer your questions to your satisfaction, volunteers information, and makes the experience convenient for you.
- A variety of options. Not all factors are created equal, so look for a company that gives you the options you need for your customers. Sekady doesn’t require you to factor every invoice you receive, giving you the flexibility to pick and choose how you run your business. If you’re interested in turning over a particular client invoice, Sekady performs a free credit review and then gives you an answer–usually within 24 hours. Then, for a small fee, you’ll get your cash by the next business day.
- Cost. Before choosing a factoring company to partner with, you should carefully evaluate the cost. These vary quite a bit and can be influenced by volume requirements, etc. Look for a company that charges a small fee, delivers quickly, and offers the flexibility you need.
There are many factoring companies to choose from and each operates a little bit differently. While one may be the right choice for your friend in another industry, it may not be a good fit for you. Approach your research with an open mind and get ready to interview several companies to choose the one that is best for your industry and business.
Interested in mitigating your nonpayment risk and getting cash in hand for the invoices you have today? Contact Sekady to learn how we can turn your invoice problem into a simple, hassle-free win!
