Estimated reading time: 6 minutes
Customers that have difficulties paying one or more outstanding invoices can have a major impact on a company’s cash flow. Granting a payment plan can be a solution.
In this article:
- we explain what a payment or instalment plan is.
- we list the advantages and disadvantages of a payment plan, for both the customer and the creditor, with a focus on the B2B market.
- we teach you how to draw up an effective payment plan as a company, in four specific steps.
- we tell you how we deal with payment plans at iController. Automation and efficient follow-up are the common thread in our story.
What is a payment plan?
A payment plan is a contract between creditor and debtor whereby it is agreed that the debt will be repaid in instalments.
Payment plans can take different forms, but without a doubt the most well-known is paying off an outstanding amount through periodic instalments.
The simple psychology behind a subscription model is that a customer feels more comfortable paying smaller amounts periodically than one large amount at a fixed time. You can offer this option with a payment plan.
Payment plans differ from, for example, a monthly software subscription in that neither the time between payments nor the amount have to be the same. A payment plan for an outstanding debt of 2,000 euros can consist of 10 monthly instalments of 200 euros, but can also be a one-time repayment of 500 euros plus five monthly instalments of 300 euros.
Why a payment plan is no bad idea
Let’s say your customer cannot pay the full amount for a variety of reasons. Granting a payment plan is then the solution.
The great advantage of a payment plan is that spreading the debt over several smaller amounts makes the repayment much more bearable for the debtor.
But there are other reasons why approving a payment plan is a good way to get outstanding amounts collected.
Advantages for the customer
- More financial breathing room
By offering them a payment plan, you give your customer a bridge over difficult periods. For example, the payment plan can be brought more in line with the customer’s cash flow.
- Spreading risk
Instead of having to pay a large amount at once (for a major order or project, for example) your customer can spread the payments over a longer period. This has less impact on your customer’s finances.
- No costly lawsuit
Proposing a payment plan first can (perhaps) avoid subsequent legal proceedings, which could be expensive.
Benefits for you as creditor
- Spreading risk
Credit risk is reduced because with a payment plan you can already collect part of the payment. Each payment made represents an amount of money about which you are certain, and that is good for your company’s cash flow. Every amount you bring in today is worth more to your business than future amounts.
- Greater payment guarantee
When your customer accepts a payment plan, they formally agree to pay the instalments. And outstanding invoices can no longer be disputed.
- Debt prevention
A payment plan can be useful for covering large invoices or projects with long duration. By dividing the amount into periodic payments (monthly, quarterly etc.) the invoice weighs less heavily on your customer. At the same time, your risk is also better covered. There is a greater chance that an invoice of 15,000 euros will be paid in five instalments of 3000 euros than in one go.
- Avoid additional costs
A payment plan is a better alternative to a more expensive collection process or legal procedure. In addition, the payment plan can serve as a basis in the event that legal proceedings do arise. The judge can then take this plan into consideration when taking decisions.
- Maintaining good customer relationships
Meeting the needs of your customer in difficult times avoids unnecessarily compromising the customer relationship. A payment plan is a better solution than putting pressure on the customer to pay everything in one go. The long-term relationship takes precedence here.
Disadvantages of a payment plan
Granting a payment plan is not always without risk.
- There is always a risk that payments will not be made and the customer will be unable to pay
- Your customer may be bankrupt before the last instalment has been paid
- It takes longer before all the money is in your account
- Following up on a payment plan is administratively time-consuming
How should you set up a payment plan?
It is best to draw up a payment plan that is reasonable and feasible. Follow these four steps to set up a payment plan.
- Consult with your customer
Reach a clear agreement on the period within which the entire debt must be repaid. Record how many instalments must be made and at what times, as well as the exact amounts. Have a viable payment plan on the table. If a longer timeframe will ensure that the entire debt can be repaid, then choose this. Payment terms that are too burdensome may result in non-payment.
- Put all agreements on paper
That way there are no discussions thereafter. Mention any costs and interests associated with the payment plan and the consequences of non-compliance with it. Avoid charging extra fees as long as payments are made on time. Politely inform the customer that if the current payment plan is not respected, it may not be possible to provide a new one.
- Start the payment plan
Send a payment reminder and/or an overview of the current payment plan. Try to automate this part as best you can.
- Follow up the payment plan carefully
Check regularly whether the payments have been made and draw up an internal procedure so that you can intervene if this does not happen. Here too, automation can take a lot of work off your hands.
Payment plans in iController: optimising the process
With iController’s debtor management software, in most cases the entire payment plan process can be fully automated.
Two types of instalment plans in iController
When preparing a payment plan in iController, there are two options: the simple calculation and the annuity-based calculation. In both cases, you can choose between weekly, bi-weekly, monthly or quarterly repayment terms.
The first option is the most flexible and you can use it if a customer wants to pay a different amount with each instalment or if the payment date is not fixed. You choose a start date for the payment plan, the amount due and the repayment term. With this form of payment, you can still subsequently adjust the payment date, the amount owed per instalment and the number of payments.
The second option is used when the customer wishes to pay off a fixed amount. You choose a start date, the date of the first payment, the repayment term and the number of instalments.
Send the payment plan to customers
When a payment plan is active, it is very easy to send it to a customer. You can send the payment plan by e-mail (with a nicely formatted template) or download a PDF.
Registration of payments
Payment of invoices that are associated with a payment plan are automatically linked. If no link is possible with your accounting software, you can manually link payments to the payment plan.
You can easily maintain an overview of ongoing payment plans in a daily to-do list. However, it is customers who deviate from the agreed payment plan that you need to follow closely. You can create and consult a separate follow-up list for this purpose.
With an automated credit management tool such as iController, payment plans are also very easy to manage. This administratively time-consuming aspect no longer has to be a nuisance in your order-to-cash process.