A payment schedule is an out-of-court agreement for the collection of unpaid debts, which allows you to defer payment of all or part of an invoice until a later date. In most cases, the payment schedule provides for regular payments (monthly, quarterly or annually) to clear the debt. Offering this option to a customer in arrears can be a real opportunity for the company. It can help reduce the risk of loss, control cash flow, and possibly preserve business relations with the customer in difficulty. Here’s how it works.
What is a payment schedule?
A payment plan is an agreement between a creditor company and its debtor customer who is unable to pay the invoice when due. The company then agrees a payment plan with its customer, spreading out the payments over time. The payment schedule specifies the duration, due dates, instalment amounts and outstanding amounts.
This is an out-of-court collection solution for trade receivables, which can be set up at the customer’s request or on the company’s own initiative. In all cases, the parties are free to accept or reject the agreement.
Why set up a payment schedule?
Setting up a payment schedule has a number of advantages, including for the creditor company.
First and foremost, a payment schedule is an effective solution for reducing loss runs. By agreeing to spread payments over time, the company ensures that it will receive payment even if it takes longer. What’s more, it preserves business relations with the customer. This is all the more important in the event of temporary difficulties.
Agreeing a payment schedule also makes it easier to monitor and anticipate payments. The agreement specifies payment amounts and due dates, enabling efficient monitoring of the file, as well as cash flow and accounting management. The company knows exactly what it will receive and when, and can act quickly if the payment schedule is not respected. What’s more, in the event of non-payment after a payment schedule has been set up, the company can send a reminder to the customer and a formal notice before terminating the payment schedule and initiating legal collection proceedings.
When should a payment schedule be set up?
A payment schedule is a good solution when the customer is experiencing temporary difficulties, especially if you want to continue your business relationship afterwards. In this case, you can decide to wait until the debt has been settled before concluding new contracts, or reduce the payment terms for future transactions.
The success of a payment schedule depends on communication and a coherent compromise between the expectations of the company, which wants to recover the amount of its invoice as quickly as possible, and the financial situation of its customer. The two must be reconciled, to avoid agreeing a payment plan that the debtor will be unable to keep.
How do you set up an effective payment schedule?
Drawing up a payment schedule
The law does not lay down any specific formalities for drawing up a payment schedule. However, for practical and evidentiary reasons, it is advisable to draw up a written agreement signed by both parties.
In practice, the clearer and more precise the content of the agreement, the greater the chances that it will be respected. This limits the risk of differing interpretations, and hence of disputes over its application. Thus, the content of a payment schedule generally includes :
- the identity and contact details of the parties;
- the nature of the non-payment ;
- the references and dates of the invoices concerned;
- the total amount due ;
- the duration of the schedule ;
- the due date for payment ;
- maturity dates ;
- the amount outstanding after each due date;
- payment methods accepted ;
- the date ;
- signature of the parties.
As regards the duration of the payment schedule, it is important to ensure that it does not exceed the limitation period. In the event of non-payment, the company can take legal action to collect the debt.
Best practices for setting up a payment schedule
To ensure that the payment schedule is as effective as possible, we recommend adopting the following best practices:
- provide for an initial cash payment, even if it is for a small sum, to prove the debtor’s good faith;
- adapt the duration of the payment schedule to the debtor’s actual ability to pay;
- include clauses that allow for the acceleration of the payment schedule in the event of non-payment and failure to pay within 15 days of formal notice. This makes it possible to demand full and immediate payment of the outstanding amount in the event of further non-payment;
- provide accurate tracking of payments.
Payment schedules and receivables management
The payment schedule therefore plays a crucial role in receivables management. It enables you to establish a new payment schedule. It is an effective lever for reducing unpaid invoices, and possible losses. Agreeing to implement a payment plan can help a company preserve its cash flow and financial health, even if it means extending payment times and therefore Days Sales Outstanding (DSO). This is why, in order to avoid any further extension of payment times and an increase in unpaid invoices, precise monitoring of payments and reminders is essential.
Conclusion
Establishing a well-structured payment schedule limits the risk of non-payment, preserves cash flow and maintains business relations with customers in difficulty. So, even if it takes longer to recover the sums due, the payment schedule is an effective solution for controlling the company’s cash flow and stabilizing its financial situation. For effective implementation and optimal follow-up, the adoption of collection software is highly recommended.
