Relying on Receivable Management Services to Chase Past-Due Invoices? Here are 13 Better Ways

Late payment is a significant problem for many businesses, hampering their cash flow, hiring plans, expansion and more. Did you know 58% of small or medium enterprises (SMEs) across the UK are currently waiting on late payments from customers? And in the US 55% of all B2B invoiced sales are overdue, while bad debts affect an average 9% of all credit-based B2B sales.

Late payment has serious impacts for businesses. In fact, a quarter of bankruptcies in Europe occur because of late payments. And even if other businesses are not driven quite to extinction by late payments, not receiving cash on time has a way of hampering growth plans, recruiting and more.

So what’s the answer? For many, the first option that comes to mind is contacting a receivable management service or debt collection agency. These companies specialize in following up delinquent clients and chasing late payment, many times by making not-so-friendly phone calls or showing up in-person to your customers’ offices.

But not so fast. There are a number of reasons why using a receivable management service (also referred to as a recovery management solution) is a bad idea. And the good news is there are many alternatives that will help your business get paid on time.

Let’s get into it.

Summary (TL;DR)

• Receivable management services or debt collection agencies are often a first port of call for businesses looking to collect outstanding payments. But they can damage customer relationships.

• Streamlining your accounts receivable (A/R) process with clear communication, reminders, and multiple payment options can significantly reduce late payments, and avoid you having to turn to recovery management solutions.

• Having a clear picture of your key AR metrics, as well as following up on overdue invoices promptly and incentivizing early payment are all keys to recovering funds without resorting to receivable management services.

• Upflow offers an alternative to debt collection agencies by automating reminders, centralizing data, and providing insights and automated workflows to improve DSO (Days Sales Outstanding).

• Many Upflow customer have seen significant improvements in Days Sales Outstanding (DSO) meaning they got paid significantly faster over time - Malt: 58% reduction, Hokodo: 75% reduction.

What is a receivable management service?

In essence, a receivable management service is a third-party company that specializes in collecting outstanding payments on your behalf. They are also known as debt recovery collection agencies. They handle the entire accounts receivable process, from sending reminders to debtors to negotiating payment plans and, if necessary, pursuing legal action.

Typically, they will do things like:

• Streamline communication: They establish contact with outstanding accounts on your behalf through phone calls, emails, and letters.

• Negotiating payment plans: Receivable management services can work with your debtors to create payment plans that encourage faster settlement.

• Skiptracing: If a debtor has gone missing, they can utilize skip tracing techniques to locate them and resume communication.

• Dispute resolution: Sometimes, late payments stem from misunderstandings or errors. They can work with debtors to resolve these issues and get the payment moving.

Why do businesses use receivable management services?

Chasing down late payments isn't exactly thrilling. For one, it can eat into valuable time your finance team could be spending elsewhere.

So, it's no surprise that some businesses choose to outsource this task to receivable management services. Here's a breakdown of why this option might seem appealing:

• When invoices pile up unpaid, your cash flow can take a major hit. Receivable management services promise to get that money back in your pocket faster, easing the financial strain.

• Building an internal collections team requires investment in personnel, training, and technology. Receivable management services can appear like a more cost-effective option on the surface.

• Wouldn't it be great if your team could focus solely on core business activities? Receivable management services offer that by handling the collections burden.

While these reasons hold weight, there are also potential downsides to consider before handing over the reins. We'll explore some alternative options you might want to explore before outsourcing collections entirely.

What are the risks of using a receivable management service?

While receivable management services can seem like a quick fix for late payments, there are some big potential downsides to consider before outsourcing your collections. Here's a breakdown of some key risks:

• Receivable management services typically charge a commission on recovered funds, often ranging from 8-10% for commercial debts. This can eat significantly into your profit margins.

• If the collection agency employs aggressive or unprofessional communication tactics, it can damage your relationship with the customer you're trying to collect from. Heavy-handed collection practices can reflect poorly on your business. Remember, customer satisfaction is crucial in today's competitive landscape.

• Receivable management services often handle a high volume of accounts, meaning your specific customer might not receive the personalized attention they need to resolve the issue.

• While reputable agencies follow the Fair Debt Collection Practices Act (FDCPA), there's always a chance they might misinterpret the law or use inappropriate tactics. This could expose your business to potential legal liabilities.

Late payment is a technology problem, not a people problem

Here at Upflow, we have a different perspective on late payments. We believe it's fundamentally a technology problem, not a people problem.

Many businesses fall into the trap of blaming late payers. And that’s often why they favour hiring a receivable management service of debt collection agency - because they can’t see any other way of recouping their overdue funds.

But what if the issue lies with how we ask for payment in the first place?

Our benchmarks show that 70% of unpaid invoices are related to technical issues, such as deliverability issues, missing validations, and payment method issues.

Think about it: you, the vendor, send an invoice which is buried deep within an email, with an unclear due date. The customer, bombarded by emails, forgets about it. 90 days later, they scramble to find the email, download the invoice, and decipher the payment instructions. This disjointed process, often repeated for countless invoices a month, creates friction and delays payment.

The solution? Streamlining and reinventing the payment process with technology and actually making it easy for your customers to pay you. We’ve seen hundreds of B2B businesses drastically improve their DSO by simply improving their processes around how they get paid.

You might have guessed that by now that we're not big fans of relying on receivable management services or debt collectors for cash collection.

Watch our (very tongue-in-cheek) April Fools' Day video below. We promise, we didn't actually launch a debt collection service!

13 ways to follow up late invoices- instead of using receivable management services

Instead of handing over the reins to a receivable management service, there are many strategies you can implement to get paid faster and maintain positive customer relationships. Let's explore these alternatives in two parts:

Part A: Streamlining Your Accounts Receivable Process

A well-oiled A/R process is the first line of defense against late payments. Getting a strong process in place for invoicing is a foundation for avoiding late payments down the track. Instead of solely focusing on how to follow up already late invoices, we’ve therefore included this ‘part A’ to help you improve the foundations of your A/R process. Here are some key areas to focus on:

1. Get a clear picture of your A/R health (and DSO)

Just like any business challenge, you can't improve what you don't measure. The first step is to understand your current A/R health. This includes knowing who has paid and who hasn't, but also calculating your Days Sales Outstanding (DSO). DSO measures the average time it takes to collect payment after a sale is made. A high DSO indicates potential cash flow problems. By tracking and understanding your DSO, you can benchmark progress and identify areas for improvement.

2. Set clear payment terms & offer multiple options

Don't leave your customers guessing! Clearly outline your payment terms on every invoice, including the due date and any discounts offered for early payment. Consider discussing these terms with your customer upfront, especially when establishing a new client relationship.

In today's digital age, convenience is key. Offering multiple payment options, such as credit cards, direct debit, and ACH payments, allows your customers to pay on time using their preferred method. Upflow even allows automatic payments through our autopay feature, streamlining the process for both you and your customer.

3. Send invoices on time (and make sure they reach the right person)

It may seem obvious, but timely invoicing is crucial. The sooner you send your invoice, the sooner it's due and the sooner you get paid. Don't delay sending invoices and then complain about late payments! Added to that, make sure your invoices are reaching the right contact. There’s nothing worse than following up a late payment to find out your old finance contact left the company a few months back!

4. Include all necessary information on your invoices

A clear and informative invoice reduces confusion and avoids delays. Here's a breakdown of essential details to include:

• Invoice Date: The date you issued the invoice.

• Due Date: The date by which payment is expected. Many invoices include standard terms like "Net 14" or "Net 30," specifying the number of days allowed for payment after the invoice date.

• Invoice Number: A unique identifier for tracking purposes.

• Invoice Amount: The total amount owed by the customer.

• Currency: If you work internationally, specify the currency you expect payment in.

• Payment Methods Accepted: Clearly list the payment options you offer (credit cards, online payments, etc.).

• Other Payment Terms: Include any additional information relevant to payment, such as early payment discounts or upfront deposits. Upflow's customer portal allows you to create invoices with all this information and even include a link for your customers to pay directly online through your branded portal.

• Bonus: include a link to pay directly on the invoice. Make it easy for your customers to pay you in just a few clicks by bringing your payments online with a solution like Payments by Upflow.

5. Send friendly reminders early

Proactive communication is key! A friendly reminder email a few days after issuing an invoice shows you're professional and ensures your customer has received the invoice with clear payment information. As Xavier Augris, VP of Finance at Botify, highlighted at our recent event: "The most important part is to make sure the invoice has been received correctly... A simple email can win you like 10 days in terms of cash collection." Upflow offers payment reminder templates you can leverage to craft these early touches.

6. Automate reminders when appropriate (and go manual when needed)

Take the manual work out of sending reminders with automated tools. Solutions like Upflow allow you to schedule timely notifications, keeping your customers informed about upcoming due dates and encouraging on-time payments. You can even personalize your communication strategy based on individual customer preferences. But don’t automate everything. Save time by automating actions that are low-risk and time-consuming, and give more of a personal touch on the very important follow ups.

7. Incentivize early payment or add late fees

Offering a small discount for early payment can motivate your customers to prioritize your invoice. If you choose to incentivize early payments, be sure to highlight it prominently on your invoice. Additionally, consider pairing this with a digital reminder, such as a text message or email, sent the day before the deadline to remind them about the early payment discount.

Late fees are a common practice in many industries. While some business owners are hesitant to implement them, researching what your competitors charge can help you determine a fair late fee structure. This could be a flat fee or an interest-based penalty. In extreme cases, you might require chronically late payers to prepay for goods or services before delivery or even discontinue service altogether.

Part B: Following Up on Overdue Invoices

Even with a well-oiled AR process, some invoices will inevitably become overdue. Here's how to effectively follow up on late payments without resorting to hiring a receivable management service or debt collections agency:

8. Analyze & focus on your most overdue accounts

Not all late payments are created equal. Time is of the essence when it comes to collections. Focus your initial efforts on invoices that have crossed the "danger zone" of being overdue by 90 days or more. The chances of collecting these debts decrease significantly after this threshold. Utilize your invoicing software's aged receivables report to identify and prioritize overdue accounts by total amount owed and time overdue.

9. Send an overdue invoice notice via email, offering a simple way to pay

In many cases, late payments are simply a matter of forgetfulness or an internal processing delay on your customer's end. A courteous first email reminder to the customer's billing contact is a great initial step. The goal is to jog their memory and ensure they have all the information needed for prompt payment.

Here are some key points to remember when crafting this email:

• Keep it professional and polite.

• Use plain text format. Avoid fancy HTML emails that might be flagged as spam or be unreadable due to the customer's email security settings.

• Don't send the email from a generic address like "[email protected]" as it might be ignored. Use a personalized sender address instead.

• Personalize the content of the email as much as possible. The more specific you are, the higher the chance of a response.

• Ideally, include a link to pay online. Our Payments by Upflow offering allows you to easily integrate the payment experience within your cash collection strategy, and make online payments easy.

10. Set a tempo for your overdue payment reminders

Don't let overdue invoices fall through the cracks! Establish a consistent follow-up protocol. There are many reasons why an initial reminder might be missed: overflowing inboxes, out-of-office contacts, or unclear payment terms. Persistence is key to recovering your funds.

Upflow allows you to automate reminder workflows, ensuring consistent follow-up without manual effort. Alternatively, services like Boomerang for Gmail can help resurface overdue reminder emails in your inbox if no response is received.

11. Call your customers who have past-due invoices

While it might seem old-fashioned, a phone call can be a powerful tool for collecting overdue payments. This personal touch often prompts a quicker response than email alone. However, reserve phone calls for situations where email reminders haven't been successful.

Just make sure you’re prepared when you call! Have a copy of the invoice, the outstanding balance amount, and invoice number readily available.

12. Involve your account managers and sales team

Don't underestimate the power of collaboration! Unresolved late payments might indicate an underlying customer dispute. Your sales or account management team, who have an established relationship with the customer, can play a crucial role in resolving the issue and ensuring payment.

13. Follow up with a past-due invoice letter (snail mail)

In rare cases, you might need to escalate your follow-up efforts. A formal past-due invoice letter sent via snail mail can grab attention, as many businesses are accustomed to receiving such correspondence. Services like Lob allow you to easily schedule and send physical mail online.

Upflow even allows you to send these letters directly from your interface, alongside email reminders. At this stage, a more assertive tone is warranted, emphasizing the overdue nature of the payment and the potential consequences of non-payment.

All-in-all, remember that the goal is to collect outstanding funds without resorting to collections agencies or legal action. If your customer is facing cash flow difficulties, consider offering a payment plan as a more amicable solution.

By implementing these strategies, you can significantly improve your collections process, reduce reliance on receivable management services, and strengthen your customer relationships.

The proof: Real results from Upflow customers

First some high-level aggregated data we analysed from our customer base in 2023.

Last year, 88% of the invoices paid through Upflow were settled within a week of their due date.

That’s right - almost 9 out of every 10 invoices running through Upflow in 2023 were paid no later than a week after their due date. Being able to significantly limit payment delays was a game changer for our merchants.

Getting paid quickly means merchants using Upflow were able to go ahead with their plans, save finance and AR teams’ time and maintain a healthy cash flow.

Added to that, when it came to late payments and invoices overdue by 12 months or more, Upflow merchants had 4,000 of these invoices paid, amounting to approximately $11 million.

That’s right - $11 million worth of invoices one year or older were paid through Upflow in 2023! Amazingly, one merchant even had a 6-year-old invoice paid through Upflow.

Now, let’s dive in to a couple of specific customer stories, focused around how to reduce DSO (Days Sales Outstanding) without having to turn to a receivable management service or debt collection agency.

Malt

Faced with rapid growth across Europe, Malt's manual collections process was becoming a hurdle. They needed a way to manage a large and ever-growing number of invoices while maintaining efficiency and customer satisfaction.

Upflow's automated reminders and streamlined workflows were the answer. Malt can now send a customized mix of automated and manual reminders, freeing up their finance team for more strategic tasks, and saving them over 160 finance team hours per month.

But the benefits go beyond just efficiency. Upflow's dashboards provide Malt with valuable insights into customer payment behavior, allowing them to prioritize collection actions and target those most likely to require intervention. This targeted approach has led to a significant improvement in Malt's DSO (Days Sales Outstanding) - a reduction of 58%.

Malt is happy they can maintain a balance between automation and personalization. Upflow allows them to tailor reminders to different customer segments and avoid unnecessary communication on disputed invoices. This ensures a positive customer experience and avoids any potential frustration caused by excessive reminders.

Read the full case study.

Hokodo

Hokodo's manual, spreadsheet-based AR process was a major roadblock to their ambitious growth plans. Multiple spreadsheets and a decentralized collection strategy made it difficult to track invoices, prioritize collections, and ultimately get paid on time. This resulted in a high DSO (Days Sales Outstanding) and a sluggish cash flow.

Upflow's centralized platform and automated workflows were the key to unlocking significant improvements. Upflow integrated seamlessly with Hokodo's existing systems, centralizing all customer invoices and streamlining the collections process. Automated reminders freed up the finance team for more strategic tasks, while insightful dashboards provided a clear view of AR metrics for better decision-making.

The results speak for themselves. Hokodo achieved a remarkable 75% reduction in DSO. This dramatic improvement translates to a much healthier cash flow and a stronger financial foundation for continued growth. Hokodo also saw a 20% increase in their cash collection rate, meaning more money readily available each month to fuel their expansion.

Upflow's impact extends beyond just efficiency. By automating routine tasks and centralizing data, Upflow also saved Hokodo an estimated €300,000 ($324,500) in potential hiring costs for additional controllers. This significant cost saving on staffing represents a tremendous return on investment for Hokodo.

Read the full case study.

Want to take the next step and see Upflow in action for yourself? Sign up for our free Discover plan, and get a real-time view of your key AR metrics.