The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
Experiencing difficulties with unpaid invoices or late payments — also known as delayed receivables — is a common challenge for business owners of all sizes. Besides frustration, delayed payments can cause serious consequences, especially for businesses facing a cash flow crunch. When consumers don’t pay for goods and services in a timely manner, a business may struggle with paying employees, buying more inventory, and investing back into the business for future growth.
That’s why having an action plan in place for unpaid invoices or late payments is a good idea. Read on for proven strategies to help get paid quickly, or at least be better prepared when a late payment happens.
No matter your business, there’s a cost of doing business. These expenses might include keeping items in stock, maintaining equipment, taking care of employees, or simply making sure the lights stay on. Keeping a healthy cash flow to sustain business operations is key to your financial stability.
There are many reasons for late payments. More often than not, your customer isn’t intentionally trying to stiff you. But they may have:
In the event that the unpaid invoice is a simple oversight, raising a red flag can often help. Sometimes, you may just need to bump the message up in a customer’s inbox. It’s also possible that they didn’t receive the invoice because the physical mail was lost or an email wasn’t delivered. Perhaps their email address was misspelled by a single character.
Short emails can be a polite way to nudge your customer that their payment is overdue. You can also send a text message or schedule your accounting software to generate automated reminders on a set schedule. To remain proactive, you might follow up with customers a few days before a payment is officially overdue to help lessen the impact on your cashflow.
Tip: Keep a detailed log of when you contact customers regarding the collection of a payment. Save dated copies of physical correspondence and notes about phone and in-person conversations. This can help reassure you that you’re not pestering your customer (we always want to keep them happy), and in the event of legal action for nonpayment, you may need the documentation.
If time is on your side, and your business can survive a few days or weeks without the missed payment in question, consider sending a personal, physical letter to get your customer’s attention. This can create a nice touchpoint to remind them that the two of you are in a relationship with one another. Keep your message concise and friendly, and give your customer the benefit of the doubt. You may want to consider offering alternative payment methods, such as credit card or Pay Later options, in case the customer has trouble coming up with the full amount due in one lump sum.
The more time passes, the harder it may be to collect an overdue payment. As soon as you notice a customer has missed a payment, reach out quickly to inquire about its status.
Sometimes, it’s best to go back to basics with a phone call. Not only will this get your customer’s attention, but it can also help you better understand why their payment is late. The more you know about the challenges they’re facing, the more likely you’ll be able to help find a solution that may get you paid sooner.
Tip: Avoid being confrontational when discussing missed or late payments. Keep conversations calm and amiable while still making sure your customer understands that late payments have a significant impact on your livelihood and your ability to keep doing business.
If you’ve sent letters, emails, texts, and even called a few times and still haven’t been paid, it’s time to demand payment firmly. Here’s what your message should include:
Depending on your business and the number of unpaid invoices, you may consider hiring a factoring service.
Businesses can sell open or unpaid invoices to a third-party factoring company, which pays the invoice at a discounted rate, usually within 24 hours. Keep in mind that this isn’t the same as a debt collection agency.
For example, say you’re waiting on a $10,000 payment from a one-time customer. If you sell it to a factoring company, you may receive 80% of its value, or $8,000. When the debt is paid, you may likely receive the remaining percentage minus any fees. Businesses in a cash flow crunch are often willing to take a lesser amount in return for a quick influx of cash. When it comes to your ability to continue doing business, a partial payment may be better than no payment at all.
Instead of a factoring service, you can hire a collection agency. The difference is that your business is typically paid after the agency collects payment (minus fees). A debt collection agency is usually leveraged for older debts that take too much time to track down.
It’s best to speak with your attorney about collection options. They can help determine the best option for the situation and advise you on how to take your customer to court. However, for small payments, these extreme solutions may not be worth it.
Make sure invoices are clear and easy to read. Your customer should be able to see where and how they can pay you, how much they owe, and for which services. Set easy-to-identify payment terms, and follow up quickly if you’re not paid on time. Accurate and timely invoicing helps ensure you get paid and avoids invoices slipping through the cracks.
Tools and technologies are available to help you streamline collecting payments. For instance, digital invoices are sent directly to a customer’s email address from an app on smart devices or through a web browser. There are also peer-to-peer apps that allow you to send or request money from a customer’s mobile phone.
Many of these payment technology tools have features to help make it easier for you to get paid for your goods and services:
When you send a digital invoice, you can set the software or app to send invoice reminders at whatever cadence works best for your business, such as weekly or monthly. This helpful feature eliminates keeping track of which customer paid what and when. Even better, you can avoid asking for a payment that was already made. Nobody likes that.
Let your customers pay you any way they like. Online payment portals allow you to take credit, debit, or ACH deposits to your business account. The more options customers have, the more easily (and quickly) they can pay. Recent studies show that U.S. consumers prefer faster, digital options to pay for goods and services.1
While there are payment technology tools devoted to sending digital invoices, you may be able to send invoices from the accounting software solution you already use.
As mentioned above, you can send an invoice reminder, an email, physical mail, or a text message, or make a phone call. You could negotiate a payment plan let the client pay over time. You can choose to take less money to put some cash in your account, use a collection agency, or take a non-paying client to small claims court. (Your attorney is best suited to advise you on what to do here.)
But sometimes, the amount of the unpaid invoice isn’t significant enough to worry about. Your time and effort may be worth more than what’s delinquent. In this case, consider cutting your losses and moving on.
If you know moving on is never an option for your business, you can set your payment terms early to include interest fees or late fees for late payments. But it’s extremely important to set these terms when the contract is initially signed.
Don’t look at fees as a punishment for your clients. Fees are designed to help cover your business’s operational costs when cash flow doesn’t come in as it should. If you’re charging interest, you could try instituting a 10% annual charge, which is only 0.83% of the total due per month. You might also consider a $25 monthly late fee.2 Just make sure the client has an opportunity to agree to payment terms ahead of time.
Contractual obligations can ensure you’re paid in full for the goods and services your business offers.
Debt collection and small claims court laws can differ by state. Collection agencies are highly regulated and must adhere to specific rules regarding how they approach debtors.
For example, in California, they’re regulated by the California Department of Consumer Affairs. Debt collectors will generally charge you on a contingency basis, but those fees can be as much as 25% to 50% of the amount collected. Or you can take a debtor to small claims court for amounts up to $10,000 or to civil court for a larger debt.3
In any event, it’s important to speak to an attorney to know if this is the right step for your business.
Remember, the best thing you can do as a business owner is keep your customers happy. Happy customers may be more likely to pay on time.
Once you’ve done your part and delivered on what was promised, it’s time to get paid. Still, taking it slow can go far in preserving a good relationship with your client.
You can send an invoice reminder, letter, or text, or give them a friendly call. Be clear and direct that on-time payments are key to your ongoing workflow. A collection agency or legal action is usually a last resort — and may not be worth your time or effort.
Invoice payment terms like payment due dates, schedules, and late-payment penalties can be helpful, but they must be established early in the relationship and adhered to.
For more articles on improving your financial wellness and streamlining business transactions, visit our Accounting hub.
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