5 Reasons a Customer May Not Pay

Over the last year, a lot of businesses aren’t getting paid by their customers! Credit insurance claims are up significantly. Commercial bankruptcy is up 26% from 2015 to 2016. Payment patterns are slowing in many countries. High levels of consumer debt are causing sales reductions in several key industries like the auto industry.

While every case of non-payment is unique to the situation, there are five common reasons customers may not pay what they owe.

1. Their customer doesn’t pay them! Coface research shows that 25% of bankruptcies are caused by a customer not paying their bill with a supplier, forcing the supplier into bankruptcy. It’s nearly impossible to see this coming from the outside.
2. Too much debt. When a company is carrying too much debt, the payments can crowd out the ability to pay suppliers. Interest payments, bond obligations and general bank debt always take precedence over trade payables, unless the payable is with a key supplier that must be paid to keep the business operating. This is why many are surprised because the customer “has always paid us.” But maybe they weren’t paying a lot of other people all along.
3. Low interest rates mask deeper problems. Our economy has enjoyed record low interest rates for almost 10 years. Now that rates are increasing, there is concern that the increased interest cost will crowd-out room to pay bills and push some companies to the edge. Bruce Nathan, Esq. of Lowenstein Sandler LLP warned in December, 2015 that Fed rate increased would likely drive up Chapter 11 bankruptcy filings. The Wall Street Journal wrote back in 2008 that if interest rates returned to normal levels, the Federal government would default because the carrying cost of the massive debt would consume most of the budget.
4. Your customer loses their key customer. What happens when your customer is overly dependent on one large contract or one large customer? Whenever a single customer or even a handful of customers represent more than 20% of sales, there is increased risk. If the key customer chooses another supplier and takes their business elsewhere, the gap in cash flow will probably mean you don’t get paid.
5. Customers with limited financial capacity. If your customers are companies that are highly leveraged, have limited financial capacity or thin profit margins, the risk of not getting paid is higher. They just don’t have the ability to absorb bumps in the course of doing business themselves and that can result in the inability to pay you.

Whenever you extend credit, there’s always a chance someone won’t pay what is owed. Due diligence beyond simple credit applications and reference checks is key to protecting your cash flow and capital. Using a credit insurance policy to manage credit, monitor customer performance and recover unpaid money is an even better idea.

Do you have any interesting or unusual stories about a time when a key customer didn’t pay? Please share it in the comments.