Business Tips

The End of Collections

Last updated January 2022

If you’re a manufacturer or a service provider to business, there’s really only one good way to handle collections, and that’s to avoid them entirely. Collections are one of the messiest and most anxiety-filled elements of B2B purchasing.  

The Scope of the Issue

The data shows the real extent of the problem. In research from Bibby Financial Services:

  • More than a quarter of U.S. small businesses said they receive B2B payments later than 30 days. 
  • 41 percent reported that invoice payment collection is their largest cash flow management challenge.
  • A quarter of U.S. SMBs said they have been impacted by bad debt they consider uncollectible. And that’s below the global average of 33 percent!
  • On average, small businesses write off $73,000 in bad debt.

In separate research from Atradius, the proportion of past due invoices in Western Europe stood at over 41 percent. The figure approaches 50 percent in the U.K and France.

Disadvantages of Collections

As invoices age, many businesses have had little choice but to turn over the debt to a collection agency. These agencies typically charge between 20 percent and 50 percent of the invoice amount, with even higher fees for invoices that are older and harder to collect. In addition to the cash flow disadvantages, in most cases, losing as much as half of the revenue from a wholesale order means not breaking even on the merchandise. Collection fees exceed the B2B supplier’s profit margins.

As the saying goes, “once bitten, twice shy.” Many B2B suppliers hesitate to form new relationships with buyers because they are concerned about the buyer’s ability to pay. As a result, they will limit the amount of product ordered, require high deposits that constrain the buyer, or feel forced to offer aggressive net payment terms. These natural cautions put a cloud of suspicion over new buyers; it’s not a good way to begin a new business relationship.

Creative Options in Installments

The world of B2C has so many other options. Merchants have allowed shoppers to use credit cards for decades, and more recently, merchants have had a range of simple alternative financing providers to offer to shoppers as well. While most of these alternative options require the shopper to apply for new credit at the time of purchase, Splitit allows shoppers to take advantage of unused available credit. 

In the past, B2B purchasers have not enjoyed this simplicity. B2B suppliers have not had the option to offer it to their buyers. Financing and credit approval work differently for businesses, so the alternative financing providers who use that model do not have a clear path to expanding into B2B. But many businesses have corporate cards. Because it does not require additional applications or approvals, the Splitit model scales seamlessly to B2B purchasing. 

That’s where Splitit Business Payments comes in. It addresses all of the pain points around collections. When a buyer places an order, Splitit puts a hold on the entire amount of an order at the time of purchase. Suppliers are always paid on time. The card issuer assumes the risk.

Are Collections Over? 

Holding entire order amounts on existing corporate credit cards means that suppliers will never need to engage a collections agency to recover unpaid order revenues. There is no longer any risk of lost revenues due to collections fees. As a result, suppliers can build relationships with new buyers with a higher degree of trust and confidence.

Collection agencies have offered a useful line of defense against losses from unpaid invoices. Up until now, they have been a necessary last resort for suppliers to recoup funds. But going forward, suppliers have a better option, and can bypass the need for collections from the very moment an order is placed.