Avoiding bad debt losses: how to safeguard outstanding invoices

If an invoice remains unpaid, you are missing the money for services, materials, and VAT—costs you have often already fronted. You can rarely eliminate the risk of non-payment entirely, but you can significantly reduce it at four points: before the job, when issuing the invoice, once it becomes due, and in an emergency. For each of these points, there are specific deadlines, statutory sections, and tools.

Quick summary

A bad debt loss occurs when a customer permanently fails to pay an invoice that is due. You can prevent non-payments at four points: check creditworthiness before the job and agree on down payments. Issue invoices immediately, in full, and with a fixed payment deadline. Send reminders after the due date on set days and, as a rule of thumb, hand over outstanding receivables to a debt collection service provider from day 15 onward, for example to Debtist. Secure receivables before the statute of limitations expires and correct the VAT in the event of a loss.

• In B2B, your customer is in default at the latest 30 days after the due date and receipt of the invoice, even without a reminder.
• Default interest in the second half of 2026 is 10.52% in B2B, and 6.52% vis-à-vis consumers.
• There is no obligation to send three reminders.
• Receivables from 2023 become time-barred at the end of 12/31/2026.

What a bad debt loss is and what it costs you

You speak of a bad debt loss when a due receivable is no longer collected in full or in part. Three stages can be distinguished. In default of payment, the invoice is overdue, but the customer can still pay. A receivable is considered doubtful if there are concrete signs against receipt of payment, such as bounced installments. It is uncollectible if you cannot enforce it in the foreseeable future.

A loss hits your profit, not your revenue. You have to earn back the money for the services you provided through new jobs. How much additional revenue is needed depends on your net profit margin:

This is not referring to the “bad debt coverage” of private personal liability insurance. That coverage applies if someone privately owes you damages and cannot pay, and has nothing to do with unpaid invoices.

Why invoices remain unpaid

Behind an outstanding invoice is one of three reasons. The customer cannot pay because they lack liquidity or are heading toward insolvency. They do not want to pay because they complain about the service or are stalling for time. Or the cause lies with you.

The third group is often underestimated. The invoice never arrived, went to the wrong department, or does not contain all mandatory information, so the customer’s accounting department holds it back. Since 2025, another reason has been added in B2B: an electronic invoice that the customer’s system cannot process will sit there and will not be released for payment. Until a proper invoice is provided, the customer is generally permitted to withhold payment (§ 273 BGB).

Checks and safeguards help against the first two reasons. The third group is entirely within your control.

Before the job: define creditworthiness and payment terms

The easiest way to avoid a bad debt loss is before you provide any service at all. Anyone who knows from the start who they are dealing with and agrees on clear payment terms has to send reminders less often later.

Credit check for new customers

Check new customers before larger jobs. A report from a credit bureau shows payment experiences and a credit rating. A look at the commercial register reveals the legal form, date of incorporation, and management. For existing customers, your own payment history is the best source: anyone who has paid late twice already gets a down payment or a shorter payment term for the next job.

Set a limit for each customer up to which you perform without security. This prevents more unpaid invoices from accumulating with a single customer than your business can handle.

Payment term, down payment, and installments

A short payment term reduces the time during which you bear the risk. Set it as short as is accepted in your industry. Payment terms of more than 60 days are only effective in B2B if you expressly agree on them and they do not grossly disadvantage you (§ 271a BGB). Stricter limits apply to public contracting authorities.

For projects with a longer duration, you limit the outstanding volume with a down payment at the start and one partial invoice per completed section. If you deliver goods, a retention of title clause in your terms and conditions secures your right to the goods until they have been paid in full.

Protection for the self-employed and freelancers

As a self-employed person, you often work for only a few clients. If one of them drops out, a large part of your monthly income can be missing quickly. Therefore, keep performance and payment close together: a written offer with payment terms, an installment per milestone, and no new work as long as the last invoice is still outstanding. A client who does not accept a down payment is thereby giving you a signal.

Advance payment or invoice in the online shop

In an online shop, the payment method determines who bears the default risk. Advance payment is safe for you, but it slows down buyers who want their goods quickly. Offering your own buy-now-pay-later purchase on account is convenient for customers—and the riskiest option for you.

A middle ground is invoice purchase via a payment provider: the customer pays later, and the provider assumes the risk for a fee. Which conditions apply is governed by the respective provider. With the Mollie payment link in easybill, your customer pays directly from the invoice via link or QR code, including with Apple Pay, Klarna, credit card, PayPal, or SEPA. Fees apply for payments via Mollie.

Avoid bad debt losses: Issue invoices in a way that ensures they get paid

Every day between providing the service and issuing the invoice extends your risk. Therefore, write the invoice immediately after the service and send it to the department at the customer that actually pays.

An invoice without complete mandatory invoice details does not have to be paid by the customer right away: until you submit a proper invoice, they may generally withhold payment (§ 273 BGB). Instead of “payable immediately,” state a specific date, for example “payable by 11/24/2026.” That makes the due date unambiguous.

A special rule applies to invoices to consumers. For them, automatic default after 30 days applies only if the invoice expressly points out this consequence (§ 286 (3) BGB). A sentence such as “If payment is not made within 30 days after the due date and receipt of this invoice, you will be in default.” should therefore be included on every B2C invoice.

In B2B, domestic companies have had to be able to receive electronic invoices since 01/01/2025. A structured e-invoice in the XRechnung or ZUGFeRD format can be processed directly by the customer’s accounting department without manual entry. A payment link or QR code lowers the hurdle even further because the customer does not have to type in an IBAN.

From the due date: a dunning process with fixed days

The older an outstanding invoice gets, the harder it is to collect. To avoid a bad debt loss, you therefore need a fixed process with clearly defined days instead of case-by-case decisions about “whether you should wait a bit longer.”

In B2B, your customer is in default no later than 30 days after the due date and receipt of the invoice, even without a reminder (§ 286 (3) BGB). From then on, they owe default interest: nine percentage points above the base interest rate in B2B, five percentage points for consumers (§ 288 BGB). The base interest rate has been 1.52% since 07/01/2026, making the default interest 10.52% and 6.52%. The next adjustment will take place on 01/01/2027. In addition, you can demand a €40 default flat fee from business customers (§ 288 (5) BGB).

There is no obligation to send three reminders. A clear payment reminder with a deadline is sufficient; every additional stage only costs time. You can use this roadmap as a guideline:

If payment discipline is poor, a phone call does more than a third letter. You’ll find out whether the customer can’t pay or doesn’t want to pay. If you agree on installment payments, put it in writing. For customers with ongoing deliveries, a delivery stop until payment is received is often the most effective signal.

In easybill, you create reminders and payment reminders manually or have them sent in fixed stages via automated dunning. Automated dunning is included in the Premium plan.

Hand over outstanding receivables to a debt collection agency

If your customer does not respond to a reminder and a dunning notice, handing the case over to a debt collection agency is the next step. Out of court, the collection agency handles communication with the debtor, arranges installments, and, if necessary, initiates the judicial dunning procedure.

For the handover, the collection agency needs the invoice, the reminder history, the current payment status, and the customer data. If this information is scattered across emails and spreadsheets, compiling it takes time. easybill offers, for example, a debt collection interface to Debtist for this purpose. Outstanding invoices are sent directly from easybill to Debtist—without export and without duplicate data entry. The debt collection interface is included in all easybill plans, including the Free plan.

The costs for debt collection are based on an individual offer from the collection agency. Our guide Hiring a debt collection agency explains when a handover is worthwhile and which requirements apply.

Factoring, debt collection, or credit insurance: what fits when

The three instruments address different points. Debt collection collects an outstanding receivable but does not assume any risk: if the customer is insolvent, even the best collection agency can recover little. Only true factoring and trade credit insurance assume the default risk itself.

Factoring vs. debt collection

With factoring, you sell your receivable to a factoring company and receive most of the amount right away. With true (non-recourse) factoring, the buyer bears the risk that your customer won’t pay. This is called Delkredere. This improves your liquidity, but it comes with fees for every invoice, and your customer will generally notice that a third party holds the receivable. You use debt collection only in individual cases, when an invoice is already overdue. It doesn’t cost anything as long as everything runs smoothly, but it doesn’t protect you against insolvency.

Trade credit insurance for small businesses: costs

What trade credit insurance costs depends primarily on your invoice-based revenue, your industry, the structure of your customers, and the amount of the deductible. There are no fixed prices; insurers calculate each contract individually. Get several quotes and compare for which customers the insurer grants a limit. The insurance is especially worthwhile when a few large customers make up a high share of your outstanding invoices.

Accounts receivable management: keep an eye on liquidity

Accounts receivable management means monitoring outstanding invoices continuously instead of only at month-end. Check your open items at least once a week. With automatic payment matching, easybill assigns incoming payments from the bank account to invoices, so you only see the items that are actually still outstanding.

One metric shows how quickly your customers pay: the average collection period, in English Days Sales Outstanding (DSO). You divide outstanding receivables by the revenue for a period and multiply by the number of days. With €20,000 in outstanding receivables and €60,000 in revenue over 90 days, the collection period is 30 days. If the value increases, your customers are paying more slowly.

Also pay attention to concentration risk. If a large portion of your outstanding receivables relates to a single customer, that customer’s default weighs more heavily than that of ten small ones. Here, the customer limit from the credit check and insurance can help.

If the receivable defaults: statute of limitations, VAT, accounting

Even a receivable that can’t be collected at the moment doesn’t immediately lose its value. Three points determine what you’re left with.

Outstanding invoices become time-barred after three years, calculated from the end of the year in which the claim arose (§§ 195, 199 BGB). Claims from 2023 therefore become time-barred upon expiry of 12/31/2026. An out-of-court reminder does not stop the limitation period. Only a lawsuit or service of a payment order (Mahnbescheid) suspends it (§ 204 Abs. 1 Nr. 1 and 3 BGB). For this reason, check in November and December which old receivables are still outstanding.

Under accrual VAT (Sollversteuerung), you have already remitted the VAT to the tax office when you issued the invoice. If a receivable is uncollectible, you correct the VAT under § 17 Abs. 2 Nr. 1 UStG. A mere delay in payment is not sufficient for this. Under cash-based VAT (Ist-Versteuerung), you only pay VAT once the money has been received. The tax office allows this upon application if your total turnover in the previous year was not above €800,000 (§ 20 UStG, threshold since 2024).

How you write down and treat a doubtful or uncollectible receivable in the financial statements is something you clarify with your tax advisor.

This article is for general information and does not replace tax or legal advice.