Offering net terms to customers can fuel business growth by attracting larger orders, fostering long-term relationships, and boosting customer loyalty. However, the flip side of this attractive proposition is managing accounts receivable (AR) collections. Late payments and delinquent accounts can quickly lead to cash flow disruptions, bad debt, and increased operational costs. In this blog, we’ll delve into essential statistics, common challenges, and actionable strategies to enhance your AR collections process. Plus, we’ll explore a solution that can free you from the burden of collections entirely.
Common Challenges in Accounts Receivable Collections
Managing accounts receivable collections can be a complex task, especially when offering net terms. Here are some of the most common challenges faced by businesses:
1. Delayed Payments
Whether your buyers are dealing with cash flow challenges or simply have long and inefficient internal approval processes, delayed payments are one of the most common challenges.
Late payments are a pervasive issue, with 50% of B2B invoices in the U.S. being paid late. These delays not only strain cash flow but can force you to delay your own payments to suppliers, accrue higher interest on loans, and ultimately hinder business growth.
The average Days Sales Outstanding (DSO) in the U.S. is 49 days, meaning businesses wait about a month and a half to collect payments. While this is better than the global average of 59 days, there’s still significant room for improvement.
2. Disputed Invoices
When B2B invoices are disputed, it leads to additional days of payment delays. These disputes often stem from billing errors or misunderstandings about the terms of the agreement. A report found that the leading cause of late payments in the US, Mexico, and Canada (USMCA) region was invoice disputes. On average, 66% of businesses received overdue payments more than a month after the due date.
3. Inefficient Processes and Communication
Without streamlined systems, collections teams can be bogged down by manual invoicing and inconsistent follow-ups. Last year, 53% of companies in the USMCA region reported spending more time and resources than they did in 2022 to resolve unpaid invoices.
4. Customer Financial Stability
Not regularly reassessing the financial health of your customers can expose your business to unnecessary risk. Annually, 1.5% of B2B receivables in the U.S. become bad debt, negatively affecting profitability. In 2024, bad debts averaged 8% of all B2B credit sales.
6 Actionable Tips to Improve Your Accounts Receivable Collections
To overcome these challenges, here are six proven strategies you can implement to improve your AR collections process:
1. Automate Your Invoicing and Payment Systems
Automation can drastically reduce errors, ensure timely invoicing, and simplify follow-ups. A PYMNTS survey of CFOs in wholesale and manufacturing found that 91% saw efficiency gains from digitizing payments, 84% improved working capital, and 62% reduced costs. Automation tools can send automatic reminders, track outstanding payments, and generate reports that help you stay on top of collections.
2. Set Clear and Concise Payment Terms
Ambiguity in payment terms is a leading cause of disputes. Use straightforward language in your contracts and invoices, making sure customers fully understand the payment timeline. Regularly review and update your terms to keep them aligned with your business goals and industry standards.
3. Proactively Communicate with Customers
Don’t wait until a payment is overdue to contact your clients. Proactive communication, such as sending reminders before the due date, helps keep payments on track. Using multiple channels—email, phone calls, and automated messages—ensures that no touchpoint is missed.
4. Offer Early Payment Incentives
Incentivizing early payments with small discounts can significantly improve your cash flow. Ensure that these incentives are financially viable for your business, and clearly outline the terms for qualification. A small discount for early payments can also build loyalty among your customers.
5. Segment Your Customers for Targeted Collections
Not all customers are equal in terms of payment behavior. By segmenting your clients based on payment history and financial risk, you can prioritize collections efforts where they are needed most. High-risk clients should be followed up with promptly, while reliable customers may be given more flexibility.
6. Provide Flexible Payment Options
Offering flexible payment terms, such as installment plans or extended terms, can help customers facing temporary cash flow problems while maintaining strong relationships. Flexibility often makes it easier for them to pay on time.
How Net Terms with Balance Can Simplify Accounts Receivable Collections
While optimizing your accounts receivable collections process is important, there’s an even better way to eliminate the hassle altogether. With Balance automated net terms solution, you don’t have to worry about managing collections yourself. Here’s how it works:
AI-Powered Net Terms: with Balance you can offer buyers instant trade credit without the AR overhead. Balance automates the entire process — from buyer qualification to invoicing and collections — freeing you from follow-ups, dispute management, and collections headaches.
Zero credit risk: Balance assumes the risk for any buyers approved for credit. You’ll get paid no matter what and never have to chase payments or worry about bad debt from customers.
Advanced payments: Need to improve your cash flow? Opt to receive upfront payments upon invoice generation ensuring a steady cash flow
By partnering with Balance, you offer your customers the flexibility of net terms while streamlining your cash flow and removing the burden of accounts receivable management including collections.
Conclusion
Managing accounts receivable collections is essential for maintaining a healthy cash flow, especially when offering net terms to customers. By implementing automation, clear payment terms, proactive communication, and flexible payment options, you can significantly improve your collections process. However, with Balance, you can take this a step further—offering net terms without the worry of collections. Balance assumes the credit risk, handles the collections, and lets you focus on what matters most: growing your business.
Ready to simplify your collections process? Let’s talk about how Balance can help!
