Business-to-business (B2B) relationships and collections are more complex than business-to-consumer (B2C) relationships and collections. In a B2C environment, there could be thousands of consumers working with or purchasing from the business. Commercial relationships go much deeper than that, where the business itself works with fewer customers, the sales cycle is much longer and results in larger invoice amounts. An unpaid B2B invoice could pose more of a challenge to a business' cash flow than an unpaid invoice from a consumer.
There are Collections differences between B2B and B2C. Understanding these will Highlight B2B Collections Best Practices.
Business to business collections
vs. Business to consumer
In order to examine the differences between the collections process, let's examine the differences between B2B and B2C in general:
In a typical consumer transaction, the decision making process is substantially shorter. Consider selling your wares at a market or when you eat out at a restaurant. Other than the delay in making the choice among many other vendors or many other options, the decision-to-buy process is relatively quick.
With a business-to-business decision, the needs fulfillment is more complex and therefore, the relationship between the businesses must be established. The longer process includes evaluating the needs, seeking a match, considering the services or products, researching the business, building trust and then making a decision.
A business-to-consumer transaction typically involves one stakeholder - the consumer. It's the consumer who is making the decision, the consumer who is consuming the goods or services, and the consumer who is responsible for the payment of the goods or services.
Due to the nature of the decision-making process in a commercial transaction, because there is more at stake, many people may be involved in the relationship. These decision makers could range from management to ownership or both.
As a consumer, once you've purchased an item or a service, your relationship may be over with the business. Special cases may involve ongoing services such as utilities, banking or healthcare. The relationship is transactional, however, and may not be dependent on contractual terms. The business works with thousands of consumers.
A B2B relationship, however, is a lengthier partnership. Businesses work together to the benefit of each other. One serves a purpose to another and gets paid for it. The relationship is perhaps the most important part of the process and must be continually nurtured in order to continue to meet the needs of the partner. Business partnerships are fewer and are therefore more influential to the cash flow.
Billing for a B2C transaction may be done immediately, invoiced later or through a payment plan. The business expects that the consumer will pay their bills on time. If the consumer does not pay on time, the business has options including terminating service, repossessing the product, evicting a tenant or hiring a collections agency to attempt to recover the debts.
B2B billing could involve accounts payable and accounts receivable, credit, financing and invoicing. Payments are cyclical and may possibly require approval before being processed. Both parties are involved in the payment process and it may be documented in a signed contract. If a payment is not made, a business has options including hiring a collections agency or going into litigation.
B2B Collections Best Practices
As the differences have revealed, collecting on a B2B debt needs to be handled differently than B2C. Consumer collections are protected and dictated under the Fair Debt Collection Practices Act (FDCPA). This legislation does not apply to B2B collections, however. Bearing in mind that the business relationship may continue after payments have been recovered, a best practices scenario for the B2B collections process is:
- A Demand Letter - This initial communication will let the debtor know that the business is attempting to collect a past-due amount. The letter will inform the business of the amount owed, give them an opportunity to respond or deny the debt, and allow the opportunity to pay in full, pay partially or make alternative arrangements.
If the demand letter doesn't prompt a resolution to the debt, the next option in B2B collections is:
- Attempting to contact - Because the FDCPA requirements don't apply to commercial collections, businesses are allowed to do a little investigative work to contact their debtors. Certain tactics that are forbidden with consumers, such as skip tracing or calling many times per day, may result in a payment recovery or resolution from the business.
At this point, many businesses may resolve to hiring a law firm in order to collect. At BYL, we recommend one more step:
- Hiring a B2B Collections agency - Because a commercial contract has more at stake - a longer sales process, a long-term relationship, higher balances - hiring a collections agency is another way to collect without damaging the B2B relationship with a lawsuit.
Attempting to collect from a consumer takes drastically different efforts than commercial collections. A relationship is at stake and one that took longer to establish. There are also fewer leads in a B2B pipeline should you lose the business. However, because the partnership was in contract and an invoice is unpaid, businesses still have options to collect. In fact, because volumes are lower and the balances are larger, a collections agency may be more successful at recovering these debts and save businesses time and money they'd spend in a courtroom.
Recognizing a specific need for B2B collections and business relationships, BYL Collections spun off another company, Enterprise Recovery. Enterprise Recovery works exclusively with B2B clients. If you're considering hiring a collections agency, the agency should offer you a healthy recovery rate for commercial collections. Click the link below to learn more about the B2B collections process.