How to Protect Your Company from Default Payment 

Any company, of any size, should always do what it can to shore up finances in case of a few defaulted payments. Even so, many still underestimate just how disastrous a few unpaid invoices from a corporate client can be. Payment defaults can wreak havoc with a company’s liquidity and its profits. Even a perfectly healthy and growing business can be hurled into turmoil with a few unpaid invoices. The reason for this goes back to the essential question of maintaining a healthy cash flow. Far too often, cash flow is predicated on projections of income over a period of time. If that income is projected to come in and then does not, things can go downhill pretty quickly. 

Maintaining a healthy cash flow is so important for a business that most experts consider it more important than overall profit margins and revenue. This is because having the money when you need it is just as vital as having it at all. Cash flow problems can certainly be ameliorated by using debt factoring and loans, but these invoices need to be paid. It is one thing not to have the money when you need it because an invoice payment isn’t due for another two weeks, but quite another to simply never receive the payment at all. 

Planning Right 

Accordingly, it should come as little surprise that the way around the problem of defaulted payments is to plan for them. This might seem a little strange. After all, why would you even go into business with a company that you expect not to pay their invoices! For sure, vetting clients and only going with those you are confident will pay is perhaps the best way to avoid defaulted payments, but payment defaults can happen for a wide variety of reasons. 

Just as all these unexpected problems are things that can take you and your business by surprise, so too can a previously solid client that starts to default (for any number of reasons). Perhaps the market is volatile and your client’s stock price plummets; or maybe a supply chain crisis cripples their inventory at a moment’s notice. You simply never know, and so you should cover the necessary bases ahead of time. 

Payment Disruption Versus Non-Payment 

Financial experts distinguish between what is known as payment disruption and non-payment, and you should to. Payment disruption is any change to the ordinary payment schedule (such as late payment), whereas non-payment only applies to situations where it is clear that the payment needs to be written off. fastFACTR, an invoice factoring service out of Utah, says that their services may be lifesaving in any number of payment disruption situations – but non-payment is something else entirely. 

How to Protect Your Company 

So, how do you protect your company from the perils of non-payment? Like so many of these things, it all begins with a risk assessment. You should conduct a credit check on the client, especially when there is any suspicion that payment default could happen. Another great tip is to officially record your dealings with a customer, noting all things like late payments and their general history of business with your company. Once warning signs start to accumulate, you should stop doing business with that customer.

Ultimately, this is what it comes down to and you just need to be vigilant enough to notice the signs of a possible payment default before it happens. With the help of some financial experts though, it should be perfectly possible to effectively assess the risk inherent in a client and keep a close eye on their conduct.