Preventing late payments — this is how you protect your liquidity

What is late payment and why is it problematic?

Payment delay means that a customer fails to meet his payment obligations on time. According to Section 286 BGB, late payment usually occurs automatically 30 days after the due date and receipt of the invoice — provided that no other period has been agreed. Companies may then calculate default interest and, if necessary, initiate dunning procedures.

Late payments are not just a hassle, but can lead to significant financial and operational challenges for companies. The biggest consequences of late payments include:

Liquidity impairment

Sufficient liquidity enables your company to pay bills on time, pay salaries and finance future investments. However, if customers do not pay their invoices on time and no payment has been received, Do these liquid money flows stall. This can result in your company getting into difficulties and having to take out loans, for example. Such interim financing is not only costly but also risky, particularly when further defaults are imminent.

Payment delay example

A production company has outstanding receivables of 100,000 euros from several customers who are in default of payment. At the same time, a due supplier invoice of 50,000 euros is outstanding. Without timely receipt of payments, the company cannot pay this invoice, which can lead to delivery difficulties and possibly even to a production standstill. Such scenarios not only jeopardize liquidity, but also the trust of business partners.

Additional costs and administrative burdens

Late payments almost always entail increased administrative costs. Writing reminders, contacting defaulting customers and hiring collection service providers or lawyers costs time and resources. This not only results in direct costs, such as Reminder fees or Attorneys' fees, but also indirect costs: The working time, which is spent on receivables management, is missing elsewhere, for example when acquiring new customers or developing the business.

Negative effects on credit rating

Another consequence of late payments is the impairment of the creditworthiness of the affected company. Credit rating reflects the Your company's creditworthiness and is a central factor in granting loans or negotiating favorable payment terms with suppliers.

When outstanding receivables become permanently bad cash flow , companies may no longer be able to service their liabilities on time. This is reflected negatively in their credit rating.

The relationship between creditworthiness and liquidity

The creditworthiness and liquidity of a company are closely linked. Stable cash flow improves creditworthiness, as liabilities can be paid on time. Conversely, disrupted cash flow affects the credit rating and increases the risk of further financial difficulties. This vicious circle shows how important it is to avoid late payments from the outset.

Preventing late payments: 5 preventive measures

The good news: You can be proactive to avoid late payments. Here are the most important preventive measures, including practical tips, with which you can secure your liquidity and prevent payment defaults in the long term.

1. Clear contract drafting

Well-thought-out and precisely formulated contracts are the basis for every business relationship. Your contract terms should No room for misunderstandings leave — in particular with regard to payment terms, modalities and consequences in the event of late payment.

Our tip: Explicitly agree that Interest on arrears be charged if the customer does not pay on time. Such clauses increase liability and motivate customers to pay on time. In addition, your General terms and conditions (AGB) must always be legally checked and formulated in an understandable way in order to avoid subsequent disputes.

2. Credit check

One of the most effective measures against late payments is to check the creditworthiness of potential business partners. Through a credit check, you can find out whether your customer has a solid financial basis and How high is the risk of a payment default. Based on this information, you can adjust the cooperation, for example, request a down payment or agree on stricter payment terms.

Our tip: Use the services of credit agencies such as SCHUFA or Creditreform to obtain reliable information about your customer's creditworthiness.

3. Optimized invoicing

Invoice errors are among the most common causes of delays in payments. That is why a error-free and complete invoicing The be-all and end-all in the company. Make sure that every invoice includes the following points:

• Complete and accurate customer data
• Clear description of services or products
• Due date and bank details
• Possible discount options for early payments

Our tip: Digital solutions such as Tidely help you keep track of pending payments and thus your Invoice management to optimize.

4. Early payment incentives

Set positive incentives to motivate your customers to pay quickly. Discounts or discounts can work wonders here. For example, you could offer a two percent discount if you pay within seven days.

These measures reward quick action and strengthen your company's liquidity. Studies such as Payment study 2020 by Dun & Bradstreet confirm that with such offers, customers are more willing to pay their invoices early.

5. Efficient receivables management

Even with the best preventive measures, late payments cannot always be completely avoided. It is therefore important to establish a structured receivables management system:

• Reminder system: Automate payment reminders and reminders to reach defaulting customers in good time.
• Clear escalation levels: Define when you will take which measures — from friendly payment reminders to collection procedures.
• Transparency: Monitor outstanding receivables regularly so that you always have an overview and can act early on.

Tip: factoring can be an effective addition to receivables management. When factoring Are you selling outstanding receivables to a service provider and immediately gets liquidity. This allows you to minimize payment defaults and keep your cash flow stable.

Every euro that is lost due to late payment must be compensated by additional income. Preventive measures save you time, nerves and money. With a clear system, you not only create a secure financial basis, but also strengthen the trust of your business partners in your professionalism.

What to do if late payment cannot be prevented?

Despite all preventive measures, customers may not pay their bills on time. In such cases, it is important that you know your rights and proceed in a structured manner.

1. Keep calm and provide an overview

Before you take action, you should ensure that all requirements for late payment have actually been met. According to Section 286 BGB, payment is usually delayed 30 days after invoicing, unless another payment period has been agreed and the customer has duly received the invoice. The first step is therefore to objectively assess the situation.

2. Send a friendly payment reminder

A payment reminder is not legally binding and serves to kindly remind the customer of outstanding amounts. It shows that you are keeping an eye on the defaulting payments.

3. Initiate payment procedure

If the payment reminder is not noticed, you can send a reminder in accordance with § 286 BGB. In doing so, you have the right to charge default interest and reminder costs. According to Section 247 BGB, the default interest rate is currently five percentage points above the base interest rate for consumers and nine percentage points for companies.

4. Escalate: Debt collection or court payment procedure

If no payment is made even after the third reminder, you can hand over the claim to a collection agency or initiate a court order procedure.

Detailed information about your rights in case of payment delays can be found in our article: What to do in case of late payment? Rights as a company.

Digital tools to avoid payment defaults

One of the most common causes of late payments is unclear payment terms and a lack of transparency about financial obligations. There are also organizational challenges such as a lack of overview of outstanding receivables or inadequate cash flow management. Digital tools such as Tidely Start right here and are a real game changer when it comes to preventing payment defaults. They enable you to automate time-consuming processes and provide real-time insights into your finances.

Tidely allows you to precisely Monitoring your payment flows, so that you always have a clear overview of outstanding receivables, incoming and outgoing payments. The simple Integration with existing accounting and invoicing programs Does your Transaction and invoice management yet particularly efficient and scalable. Your invoices and transactions are automatically synchronized, categorized, and the invoice status updated. With precise Cash flow forecasts You can also identify potential bottlenecks early on.

All of this helps you to efficiently process outstanding receivables, avoid late payments, take the right measures and manage your liquidity in a targeted manner.

FAQ

How can I calculate default interest?

Interest on arrears is charged in accordance with Section 288 BGB in order to compensate the creditor for a late payment. The calculation is based on the current base interest rate, which Deutsche Bundesbank Set for January 1 and July 1 of each year.

Example: If the base interest rate is 3.37% (as of July 2024), the result is:

• For consumers: default interest rate = 3.37% + 5% = 8.37%
• For companies: default interest rate = 3.37% + 9% = 12.37%

The calculation: Interest on arrears = (outstanding amount × late interest rate × number of days in arrears)/365

Example: With an outstanding amount of 1,000€ and a default interest rate of 12.37% (company) for 30 days, the result is: default interest = (1,000€ × 12.37% × 30)/365 = 10.16€

How can you avoid late payments?

Payment delays can be avoided through clear payment terms and error-free invoices. Precise information on due dates and incentives, such as cash discounts, motivate customers to pay on time. A credit check of potential business partners protects against risks in advance and efficient receivables management using software ensures that payment reminders and reminders are sent automatically and that outstanding receivables remain in view.

How many days can a payment be delayed?

The period after which a debtor defaults is regulated by law in Section 286 BGB. Payment is usually delayed 30 days after the due date and receipt of the invoice — unless another payment period has been contractually agreed. For consumers, this 30-day rule only applies if they have been expressly informed of this in the invoice. Companies can default more quickly if a shorter payment period has been agreed in writing.