Have you ever gotten an angry email from one of your company’s vendors? These are the emails reminding you that you have an outstanding balance that’s still due.
But you think to yourself, hey, didn’t I make that payment? Don’t we have automatic payments set up?
It’s likely that your business experienced a failed payment. This happens on occasion and can have serious consequences for your business.
Most fledgling startups might think of a payment failure as a minor inconvenience.
However, it’s imperative to set systems in place to avoid future instances of payment failures.
Here’s what you need to know about a failed payment in your business:
1. What a Failed Payment Does
This happens when a payment is unable to reach its intended recipient. It doesn’t mean that the payee doesn’t wish to make the payment.
There might be a connection issue, a bank error, or any other issues for the failed payment.
Usually, the payee gets informed of the failed payment. Afterward, the payee can figure out how to rectify the payment.
But why are failed payments such an issue? It can result in involuntary churn. For example, a vendor might cancel an order as a result of a failed payment.
You’ll have to go through the hassle of placing an order from scratch. This can delay you providing your products/services to your customers.
We’ll discuss more details about involuntary churn later in this guide.
As a result, you want to figure out how to reduce failed payments as much as possible. Let’s have a look at what you can do.
2. Insufficient Funds
For many of your services, you’ve likely set up automatic billing. The vendor will deduct the funds on a set date from your funding source — such as a bank account.
As a result, you want to make sure you always have sufficient funds. One of the best ways to do this is to write down your expected expenses each month.
Here’s an example of a company’s monthly expenses:
- $1000 for ordering goods from the manufacturer
- $200 for internet connection
- $100 for web hosting services
- $700 for labor costs
In total, this company spends $3,000each month for its expenses. It needs to make sure that its funding source always contains a minimum of $3,000 at all times.
To be on the safe side, it’s best to have extra funds in case of emergencies.
3. Incorrect Information
You also want to make sure your funding information is always correct. One of the most common reasons why a payment fails is because you forget to update your new bank account information.
Your first step after opening your new business bank account is to update this information for all your vendors. What if you get a new business credit card? Make sure you update this information with all your vendors.
If you use payment authorization services such as Stripe and PayPal, make sure you update them with your new funding sources.
With bank accounts, it might take a few business days to update with payment authorization services. As a result, you want to do this as soon as possible.
4. What Involuntary Churn Does
Let’s look a bit deeper into involuntary churn now. If your vendors get regular failed payments from you, they might lose trust in your company altogether.
This can mean that you lose vendors that provide the goods you sell. It can take weeks or even months to find the next vendors for your brand.
In the meantime, you can expect your customers to get frustrated with your low inventory. What about your customers? How does involuntary churn affect them?
Think about the major online retailers today. How often do you have issues making payments on Amazon?
Most likely, these incidents have been rare or you haven’t experienced it at all! This reliability is what keeps Amazon’s dominance as the foremost online retailer.
But what if you dealt with a smaller online store? What if you received an email stating “Sorry, your order didn’t go through. Please try again!”
Eventually, you’ll get tired of trying and the online store has lost a customer.
You want to make sure this doesn’t happen to your business. You have to expect that most customers will be impatient and will move onto the next retailer.
5. Dunning Software
If you want your business to run efficiently, you want to find a way to reduce payment failure as fast as possible. The best way is through use dunning software.
Dunning software makes it faster to address payment failures without you having to do it manually.
For example, you can set up automatic retries with the dunning software. This means that if a payment fails, the software will attempt another payment a few times. If one funding source fails, the dunning software will use a backup funding source for payment.
If your customer’s make a failed payment, the dunning software will send them reminder emails to retry the payment. This is the most efficient method to improve your payment success rate.
6. Failed Payment Recovery
The final step is to set up a process for failed payment recovery. Make sure you assign at least one team member to handle this process.
The first step is to make sure you have at least two funding sources. If one bank account has insufficient funds, there should be another with sufficient funds.
To return to the previous example, consider having two bank accounts that have enough funds to cover the monthly expenses.
Make sure that your company has at least two credit cards for making payments. Use at least two payment processing services to receive payments from customers.
You should also diversify payment options for your customers. These include credit card payments, ACH payments, eChecks, and cryptocurrencies.
The more choices there are, the greater the likelihood of a customer retrying their payment if one payment option fails.
Reduce Payment Failures
Now you know the issues surrounding a failed payment and how to prevent these for your business. Start by keeping records of how many expenses you owe each month. Keep track of how many failed payments have already occurred.
Create multiple funding sources for sending and receiving payments. Choose a dunning software to ensure you can always collect payments from customers.
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