Invoices are often paid late. And some aren’t paid at all. Learn to manage your outstanding invoices with this guide.
How do unpaid invoices affect your business?
Being paid late from time to time is going to happen. But if it happens too regularly, or the payment window is too long, it can have a drastic effect on your business. Outstanding invoices disrupt your cash flow, making it hard to cover your essential operating costs and financially plan for your business.
For instance, unpaid invoices can put a strain on your other business relationships, like with suppliers, because if you haven’t been paid then you won’t be able to pay them either. This could impact your own credit rating and professional relationships, making it difficult to get work in the future. If you don’t watch out, you could be the one being chased for late payments!
Successfully invoicing and managing unpaid invoices is crucial to sustain your business’s long-term financial health.
How to chase late payments
1. Write a payment request letter or email
When you first notice your payment is overdue, send a polite payment request letter or email. In most cases this will be enough to prompt a customer to make a payment. Alternatively, if the late payment is intentional, the payment request letter will set the stage for any further action.
Why you need a payment request letter
It’s important to act quickly and professionally to avoid delays, check if the error was made in good faith, and ultimately get paid.
How to structure your payment request letter
Your payment request letter should be a brief reminder of the outstanding invoice, and communicated in a professional tone. Start with a usual greeting and then remind them of the unpaid invoice, including the specific invoice number, due date, and amount owed. Politely ask when you can expect payment and offer a brief reminder of your payment terms.
You don’t need to stipulate what the payment was for – those details should already be on the original invoice.
2. Send an overdue invoice
If the request letter doesn’t get a response, the next step is to send an overdue invoice.
An overdue invoice is essentially the original invoice except it has an ‘overdue’ stamp to give a greater sense of urgency. You can attach this stamped outstanding invoice to a follow-up email to serve as a formal reminder to your customer.
Setting up an invoice reminder schedule to your accounting routine will help you to promptly follow up on late payments, and ensure customers are aware of their outstanding invoices. You could carry this out manually, or use automated invoicing software to send payment reminders on your behalf until payment is received.
3. Send a statement of accounts
If you have multiple unpaid invoices with the same client you could send them a statement of accounts which summarises all of the outstanding payments. Accounting software can help to consolidate your unpaid invoices into one document.
This step by itself won’t necessarily reduce your overdue invoices. However, it’ll help you streamline your admin by chasing multiple unpaid invoices in one go. Consider following up with a phone call to notify them of the statement of accounts.
4. Make the phone call and prepare to negotiate
If your emails have been ignored, it might be time to give your client a call. Businesses that chase unpaid invoices by phone tend to get the best results – it’s much harder for a customer to ignore you if they’re speaking to you directly!
It’s best to have a loose structure in mind for the conversation so that it’s succinct and productive:
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After initial greetings, mention the unpaid invoices and identify which invoices you’re referring to, e.g. by their invoice number and/or date.
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Politely ask when you can expect the payment to be made.
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Wait for their response. It’s best to be silent here, even if they’re not forthcoming, to encourage them to name a date.
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Do not end the call until they’ve provided a payment date.
You may need to negotiate the terms of when you’ll receive payment. For instance, if the unpaid invoice is a relatively small amount which they can pay soon, you may agree to move the payment date but refuse to carry out any more work until payment is made.
Learning which payment negotiation strategy suits your situation is key. If you’re uncomfortable dealing with overdue invoices on the phone and negotiating yourself, you could ask your bookkeeper or accountant to handle it on your behalf.
5. Charge a late payment fee
Having a late payment fee can provide an incentive for clients to pay you on time. However, any late-fee policy you use should be clearly communicated upfront in your payment terms when you agree to carry out work for your customer.
Some businesses quote it as a percentage of the original amount due but it’s easier to do the maths for the customer and have a single fee to add on. For example:
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Total due by 1 June: $100
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Total due after 1 June: $110
Keeping it simple will motivate customers to pay on time. If they don’t pay on time, however, notify them that the late-fee has now been charged. For good will, you could offer to waive the late fee if the customer pays quickly (for example, within 48 hours).
6. Cut them off until outstanding invoices are paid
If a customer isn’t paying you or responding to your messages, it’s unwise to continue to work for them until you know you’ll be paid. You shouldn’t put your own business at risk when working with a client who potentially has no interest in paying for your services.
Inform the client that you won’t continue any work until all outstanding invoices have been paid in full. You may lose the client over this decision but it’s a necessary move to protect your business.
7. Hire a debt collector
Debt collectors specialise in recovering unpaid invoices so having a professional on side can help you get paid if the customer is no longer being cooperative. This step escalates the situation and could end the relationship with the customer, so it’s best to exhaust all other strategies for chasing invoices first. Debt collectors also take a cut of what you’re owed, typically around 25%, so you’ll need to factor that into the decision.
8. Call in the lawyers
If a debt collector can’t help or doesn’t succeed in resolving your outstanding invoices, your last resort is to consult with a lawyer. The type of legal action you’ll need will depend on the debtor’s organisation, including whether they’re a sole trader, partnership or company. You could also explore other legal avenues such as taking the client to a small claims court to recover the unpaid invoices.
Taking legal action is complex so it’s best to consult a specialist lawyer who has experience in professional invoice chasing. The debt collector you’ve previously worked with might have in-house legal expertise they can offer or refer you to a lawyer, so check with them if that’s the case.
To find out more about legal action, check the disputes register in your region.