What is a Delinquent Payment?

A delinquent payment is a late or missed payment for a fiscal obligation such as an invoice, subscription fee, or contract-based service that a customer or business client fails to fulfill by the agreed-upon date. This delay can trigger charges and penalties, service suspension and more, depending on contract terms.

Delinquent payments can have significant consequences beyond immediate fees. Delinquent accounts arise when clients, accounts or organizations fail to meet payment terms set in a billing agreement, SaaS contract or service-level arrangement.

Delinquent Payments versus Default

The terms “delinquent payment” and “default” are often confused. Here is the distinction: A delinquent payment refers to one missed payment or invoice overdue, whereas an account moves into default when multiple payment obligations are missed and the outstanding balance remains unpaid, thus leading to service termination, contract enforcement actions, or referral to a collections’ agency.

Examples of Delinquent Payments

In the SaaS ecosystem, delinquent payments refer to situations where a business client fails to pay their subscription fees on time. This can disrupt cash flow, monthly recurring revenue, and strain customer relationships.

Here are some examples:

Failed Credit Card Charges

Suppose a customer’s credit card has expired, or the issuing bank declines the charge due to insufficient funds. In this case, the subscription renewal fails, and the customer’s account enters the past due date status.

Grace Periods with No Resolution

A SaaS product allows a 7-day grace period after a missed payment, but the customer still doesn’t update their payment method. As a result, the account remains active temporarily but eventually gets downgraded, deactivated or suspended.

Trial Conversions with Billing Issues

A business signs up for a trial with billing credentials, but the trial auto-converts to a paid plan. If the charge is later reversed due to a disputed transaction or declined card, the platform may lose recognized revenue, and trigger involuntary churn.

Some other industry-specific examples include:

• SaaS platforms with payment gateways may impose late fees or allow partial payments to recover a portion of the outstanding amount.
• Marketing agencies may begin a collections workflow when an invoice is 30 days past the due date.
• Utility companies may cut off their services automatically after 2 months of non-payment.

What are some possible causes of delinquent accounts?

Credit card expiration, insufficiency of funds, forgetfulness, or financial barriers to payment are some of the primary causes of delinquent accounts.

Let’s break down the details for your ease.

Credit Card Expiration

Expired credit cards can become a possible cause of delinquent accounts. Suppose a customer is unaware that their card has expired; they are likely to miss a payment. Without billing notification or software to catch and notify of this, a business would have no method of managing this type of delinquency.

Insufficient Funds

If there is not enough to cover the balance for a payment that is due, the vendor’s payment processor will not be able to authorize the required transaction. This is likely to happen when the customer entered incorrect card information, used a different card than the one they could have, the financial institution declined the transaction owing to fraudulent concerns, or they do not have enough funds in their account. It can also be the case of having multiple large transactions hitting the account at once.

Financial Barriers to Payment

Sometimes, day-to-day chores and responsibilities can make customers forget about the liable payments. Moreover, certain financial barriers or hardships can make it challenging to complete payments in time, leading to delinquent accounts.

How does payment delinquency affect business health?

Payment delinquency puts a negative impact on business health as it affects cash flow and liquidity, credit rating and borrowing capacity, operational disruptions, customer and supplier relationships, and resource allocation and strategic focus.

Here is detail of the mentioned effects.

Cash Flow and Liquidity

Delinquent payments reduce available cash flow, thereby compelling businesses to delay their own payments to suppliers, employees, or creditors. This creates a domino effect where businesses may struggle to meet operational expenses, buy inventory, or become a part of growth initiatives and investments. Companies heavily reliant on accounts receivable are especially vulnerable in these cases, as delayed payments can strain working capital.

Credit Rating/Borrowing Capacity

Businesses having high delinquency rates often face deteriorating credit profiles, making it expensive to secure financing. Lenders view payment delinquency as a red flag indicating financial distress or poor cash management, leading to increased interest rates and stringent loan terms. This limits a company’s potential to expand, modernize, and cope with economic challenges.

Operational Disruptions

Delinquent payments can disturb the normal business operations, as suppliers may ask for cash on delivery or refuse to extend trade credit, forcing businesses to find alternative suppliers or accept less favorable terms. This can increase costs and reduce operational efficiency.

Customer-Supplier Relationships

Delinquent payments affect business relationships and bring in reputational damage. Suppliers may become reluctant to work with late-payment customers, limiting product availability or forcing businesses to incur premium prices. Word of payment difficulties can spread within industries, making it tedious to establish new partnerships or negotiate favorable terms.

Resource Allocation

Managing delinquent accounts requires significant time and resources that could otherwise be devoted to core business activities. Companies may need to hire collection specialists, engage legal services, or implement more sophisticated accounts receivable management systems. The process diverts attention from revenue generation and growth initiatives.

How can businesses avoid customer delinquency?

Automated billing, clarity of payment terms, payment reminders, team involvement, and customer communication are some ways to avoid customer delinquency.

Here’s a detail of each of the mentioned ways.

Automated billing

When a billing and subscription management software handles everything, it gets easier to communicate better with your customers. Adoption of a recurring revenue model can be challenging, especially if your payments are due at regular intervals. Billing software can handle payment processing, send auto-reminder notifications to customers, and auto-update customer information, thereby reducing the chances of late/overdue payments.

Clarity of payment terms

Lack of clarity with regard to payment terms can be a hurdle to the payment collection process. Companies where no policies are present are likely to have a difficult time with payment management from the customer’s end. Thus, for making payment terms clear, here are some tips that businesses can incorporate:

• Payment terms must be clarified in writing.
• Provide clarity on payment details, the amount due, payment deadlines, accepted methods of payment, and any charges attached to late payments or any incentives for early payments.
• Communication of payment terms before entering into an agreement is important, especially if you are offering SaaS products.
• Application of payment terms across all clients and transactions is necessary. However, there can be exceptions if payment terms are negotiated and vary for certain customers/clients.
• Establishment of clear processes and policies, in case payments become delinquent.
• Provision of a direct channel to communicate with customers and discuss their concerns regarding payment terms.

Payment reminders

Businesses can configure automatic payment reminders in case of late payments, which can help to reduce the number of delinquent payments your business account receives. After a customer signs-up or a payment due date is approaching, the software can trigger an email or SMS to remind them to ensure payment is made. This method is a polite way of reminding customers to make payments and avoid delays.

Team involvement

Businesses can communicate delinquent payments to customers via an account manager. Customers can benefit from this personalized approach through direct access to dedicated support reps who understand their account history and certain circumstances.

These account managers can serve as a point of contact for delinquent accounts, offering a human touch that automated systems cannot replicate. They can indulge in conversations with customers to comprehend the causes of payment delays, thereby understanding whether they are due to billing disputes, financial hardships, or whatever reason.

Customer communication

Customer communication allows spotting delinquency earlier and stronger relationships with customers. Early detection of potential payment issues helps businesses to transform what could become adversarial collection scenarios into collaborative problem-solving.

When companies detect any warning signs before payment becomes overdue, they can approach customers from a position of partnership rather than enforcement, thereby easing the interaction. This keeps the customer’s trust intact and also helps avoid frustration over late payments and relevant consequences.

How does SubscriptionFlow facilitate delinquent payments?

SubscriptionFlow facilitates delinquent payments by automated dunning management, smart retry logic, flexible payment recovery options, account lifecycle management, payment method updates, and smooth integrations with payment processors.

Automated Dunning Management System

SubscriptionFlow streamlines the entire dunning process through automation. It allows customizable email sequences that trigger when payments fail. The system can send personalized reminders at prescheduled intervals, escalating the tone and urgency as accounts become more delinquent. This automated approach helps to get consistent follow-up without any manual intervention, thus reducing the likelihood of accounts falling through the cracks.

Smart Retry Logic

The software deploys an intelligent retry mechanism that attempts to process payment failures at optimal times. Rather than immediately marking a payment as a failed payment, SubscriptionFlow can retry transactions several times over several days, accounting for temporary issues such as fund ’shortages or technical issues. This increases the success rate of payment recovery.

Flexible Payment Recovery Options

The software enables a wide array of recovery pathways for delinquent accounts, including partial payment plans, payment date modifications, and alternative payment methods. This flexibility allows businesses to work with customers facing temporary financial strains while still keeping the subscription relationship intact.

Account Lifecycle Management

SubscriptionFlow manages the entire delinquent account lifecycle from initial payment failure through various stages of collection efforts. The system can automatically pause services, downgrade subscriptions, or initiate cancellations based on predefined rules and timelines, ensuring consistent policy enforcement.

Payment Method Updates

SubscriptionFlow renders users with easy-to-use portals where they can update expired cards, change payment methods, or modify billing information. The system can auto-detect when cards are approaching expiration and proactively prompts customers to update their payment details, preventing future delinquencies.

Smooth Integration with Payment Processors

Our subscription management platform integrates with multiple payment gateways and processors. Moreover, it allows businesses to route transactions through a variety of channels or attempt recovery through alternative payment methods if primary options fail. This helps to avoid revenue leakages and also establishes strong business-customer relationships.