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Convert non-performing receivables into innovation capital – Success factors at a glance

Companies need to invest continuously in order to hold their own against the competition. Unpaid receivables can significantly impact liquidity as well as earnings and lead to high internal expenses for accounts receivable management. But what do you do if the cost benefit ratio for processing payment-impaired receivables is no longer adequate? Or if the capital required for the next innovation step or to expand the core business is scarce? The sale of payment-impaired receivables is a suitable alternative as long as you keep a few success factors in mind.

Companies in almost every industry face the daily challenge with defaulting customers, including telecommunications providers, energy suppliers, e-commerce companies, mobility or financial service providers. At Arvato Financial Solutions, we see regularly that the problem is unrelated to factors such as the income, age and marital status of customers. Of course, the risk of bad debts losses can be reduced, such as with preventative risk management and effective receivable management. The sale of payment-impaired receivables can be an additional step in increasing liquidity and reducing the internal work input. However, success depends on various factors. In my experience, three of the most important points are:

Determine the right time

In order to re-establish a value-generating cost-benefit ratio in their accounts receivable management, companies should decide at what point in time it no longer pays off to use internal resources and when an alternative such as selling their receivables could make economic sense. A one-off sale of receivables could, for example, be a good option for a portfolio of receivables that have accumulated over the years. An even more sustainable solution is the ongoing sale of receivables. Depending on the image of the company, this can take place from the second reminder or after several months of their own collection. Companies should seek in-depth advice and find a tailored purchase offer.

Secure reliable collection – including globally

It is clear that the customer relationship is of fundamental importance in every company! This is the case even if a customer does not pay! These customers are often only temporarily in a difficult financial situation. Depending on the scale of the total debt of a customer, such a phase may last many years. Essentially, a functional solution for the reduction of the debt has to be found together with the relevant customer. In any case, only legal collection measures must be used. Accordingly, the business partner should have the necessary experience and have good instinct in dealing with all kinds of customers, as well as always ensuring that customers are treated with respect.

Since many companies offer their products or services in more than one country, the local collection competence is another important selection criterion for the business partner. This is the case both with regard to language and cultural skills and in terms of the expertise in the legal collection processes, which vary significantly from country to country.

From my discussions with many customers, I know that the concept of “outsourcing” the customer relationship can often be a considerable obstacle to the sale of receivables at first. Nevertheless, I am also convinced that any serious business partner will discuss any possible concerns and needs of the company. There are multiple possibilities here, from scaling collection fees, the retransfer of individual receivables where there are specific image risks to the possibilities of recovering customers once the debt has been recovered. So it pays off to have a personal discussion!

Demand transparency, recognise sustainable offers

What is the value of a receivables portfolio? There are no rules of thumb here, because there is usually no simple answer to this question. Aspects such as the underlying transaction, from which the receivables result, the sales channels, the credit rating, the receivable amounts, the age of the receivables and the credit rating of the customer must be included in the assessment, as must the previous collection measures. This requires both an open dialogue between the provider and the potential buyer as well as extensive experience of the buyer in the purchase of large B2C portfolios. With the ongoing sale of receivables especially, companies need to get a good idea of whether the business partner has correctly identified and assessed the relevant influencing factors. Only then can companies ensure that an offer for the ongoing purchase of their receivables is a sustainable solution.

These are only three of the success factors that companies should think of when considering the sale of accounts receivable. There are also a few other factors for the successful sale of receivables from efficient connection and subsequent processes, ensuring compliance (e.g. data protection and VAT) to fundamental considerations regarding the purchase and assignment agreement.

With the right partner, B2C companies are able to also offer payment methods such as payment on account or payment by direct debit. This increases sales without any negative effects such as persistently high expenses in accounts receivable management and high capital commitment. Companies can use the capital more efficiently, for the next innovation step or to expend their core business. Many customers confirm this in our daily interactions. 

You can find more information on this as well as the possibility to request a consultancy or quote here.

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