A Small Business’s Guide to Handling Unpaid Invoices

A Small Business’s Guide to Handling Unpaid Invoices

A Small Business’s Guide to Handling Unpaid Invoices

“The check’s in the mail.” This idiom is a pain point for many small businesses. Collecting on overdue invoices is a necessary slog that, unfortunately, most business owners face at one time or another. Devoting resources to this work can be frustrating, as it takes time and focus away from serving other customers and improving core business competencies. But, businesses need money to survive, so entrepreneurs do what they need to make sure the cash continues flowing. Following are some ideas to help stay on top of receivables management and to keep operations seamless while handling unpaid invoices.

What’s the Difference Between Outstanding and Overdue?

An outstanding invoice or outstanding payment is simply an unpaid invoice, or a payment that hasn’t been made, before the invoice due date passes. On the other hand, an overdue invoice or late invoice is one that is still awaiting payment after the due date of the original payment request. 

An overdue payment can wreak havoc on your business’s ability to plan financially and pay your own bills. Timely payments are an important part of invoicing, and as a small business owner, being able to rely on your customers to pay on time can make all the difference in your day-to-day operations and ability to plan for the future. Chronically late payers are especially bad for business — not just because you won’t have the money in your own bank account to pay your regular expenses, but also because having an outstanding balance can hurt your cash flow, which can in turn hurt your ability to qualify for financing.

Tips for Collecting Outstanding and Unpaid Invoices

It’s true that entrepreneurs wear a lot of hats. Collections agent has got to be one of the most challenging of these. Proactive and methodical action should help ease the accounts receivable process.

Set Clear Terms

Are you sure your client even knows when their bill is due? All initial contracts should clearly state the terms, whether that’s payment on receipt of invoice, cash on delivery, net 30, or something else. Every invoice should also feature the terms and the due date in an eye-catching fashion. Some large companies may only work with vendors under certain payment terms, such as net 60, regardless of your policies. Make sure you carefully read vendor contracts so you’re aware of this upfront and you don’t waste time chasing money that the client’s accounts payable department intends to pay later. 

Send a Friendly Reminder

If a client has not paid their invoice by its due date, sending a reminder email as soon as possible can be helpful. It’s possible they simply forgot or it got buried amongst their to-dos. Keep the tone light and friendly and include payment details. To make this easier for you, set an alert on your calendar when you send your invoice noting its due date so you’ll remember to check in and send a payment reminder if it hasn’t yet been paid. You can make changes to customize your calendar using the settings screen on your device. These days, it’s very easy to automate invoice billing and set reminder notifications with an online tool or service

Institute a Late Payment Fee

There’s no motivator like money. A late fee might be just the thing to encourage your client to pay in a timely manner. If you don’t currently employ late fees when handling unpaid invoices, you’ll need to send your customers a notice letting them know that you will be instituting this policy on all future invoices. Be very clear about what the late fees are and how they will accrue. Be sure to include information about the late fee on your invoices and in your invoice reminder notices.

Send an Overdue Invoice for Unpaid Invoices

Re-sending your invoice marked as “overdue” is the next step to remind your client to pay the invoice. “Past due” should be marked in a large bold font in a bright color on the invoice (and on the envelope if it is mailed) to ensure that your client can’t miss the fact that it’s time to pay this bill.

Send a Statement of Account

At this point, it’s likely that the client has another bill due or nearly due. Sending a statement of account can clarify what is due when so the client does not become confused or overwhelmed. 

Make a Phone Call

Speaking to the client over the phone is another avenue to use to coax them into paying an invoice. Sometimes, a personal touch is all it takes for a customer to realize how non-payment might affect your business. Also, a phone conversation might reveal the reason for the late payments and allow the two parties to work together on an amenable solution.

Allow Partial Payment

Negotiating with your client on a number and allowing partial payment with payment in full coming over an agreed-upon time period could be a win-win solution. Rather than not paying at all because of a lack of funds or other issues, your client can make smaller payments over time. You’ll receive the money you’re owed in a manner that will ease whatever financial burden is delaying payment for your client.

Allow Credit Card Payment

If you don’t already accept credit card payments, it might be worth your while to do so, at least with a client for whom payment seems to be a challenge. If your client simply does not have the cash to pay, they may be able to use credit to complete the transaction with you. Though a credit card charge does come with a small fee, that amount is likely worth more than the time you would spend chasing down a payment. If applicable, you may want to treat your business like a subscription for your client and get their permission to automatically bill their card automatically each month. If they are open to this, the fee will certainly make up for the resources used for pursuing an outstanding invoice.

Cut Them Off

One approach to handling unpaid invoices and persuading a client to pay an outstanding invoice is to cut off your services until they do pay. Assuming your offerings are vital to their operations, this will surely get their attention and urge them to take care of their late payments.

Send a Certified Letter

If you think you might need to pursue legal action to get your payment, you’ll need to send a certified payment reminder letter. This will provide proof of your attempts to contact the customer for payment. The simple action of having to sign for a letter might scare your client into paying in order to avoid a legal dispute.

Depending on the amount you are owed, it may be prudent to take your client to small claims court. If the outstanding invoice is very large, you may have to begin proceedings with legal counsel. Keep in mind that engaging in any kind of legal action will involve fees, and lawyers can be expensive. But, just the idea of being sued might encourage your client to pay their bill.

Hire a Debt Collector to Collect Unpaid Invoices

Sometimes handing unpaid invoices will require you to hire a debt collector. Putting an outstanding invoice in collections is a route many small businesses choose to take. A collections agency knows what they are doing when it comes to debt recovery and will relentlessly follow up with your client until you receive payment. Debt collectors are paid a percentage of what they collect and can sometimes also charge a fee. Keep this in mind before determining if this avenue is right for your business.

Set a Contingency Plan for Dealing with Future Outstanding Invoices

Unfortunately, unpaid invoices are a common problem for many small businesses. One way to help avoid the headaches that unpaid invoices can cause is to create a good contingency plan and be proactive about collecting payments. Make sure that you have clear policies and procedures in place around your invoices, including:

  • An invoice template that you can reuse for consistency, including a clear outline of the amount due and services or products rendered.
  • Specific payment terms and due dates included on each invoice.
  • Easy-to-understand payment options for customers, as well as clear instructions on how to use payment methods included in each original invoice.
  • A contract for all customers that is regularly reviewed by legal counsel detailing what actions you will take for an unpaid invoice, including legal action, late fees, and collections, as well as a timeline of when you’ll take those actions.
  • Accounting software that is up to date to track outstanding and overdue invoices and send out payment reminders automatically.
  • A payment process to help customers who may need more time or help paying bills, because sometimes getting partial payment over time is better than none at all.

Overall, being straightforward and consistent with your customers from the start when it comes to invoice payment can help keep the relationship professional and hopefully help you avoid needing to take legal action.

Small Business Risk by Ignoring or not Handling Unpaid Invoices

If you are a small business with outstanding invoices of your own, it’s important that you understand how this can negatively affect your financial future. If you have past-due invoices in your accounts payable, your business’ creditworthiness, expressed in your business credit report, may be in jeopardy. Long-standing past-due invoices may eventually go to collection. Collection agencies report to the credit bureaus.

Your vendors also report to the credit bureaus. Additionally, a vendor may lower your credit limit with them or stop accepting any business on your account. That can cripple your business. And, since this will inform your credit score, other vendors may not be willing to extend you credit or work with you at all. So, if you are having trouble paying your own bills because your clients aren’t paying theirs, make sure to communicate with vendors and service providers proactively and create a payment plan so you won’t damage your financial standing. Or, consider financing options to keep your business afloat while you address these challenges.

Small Business Financing for Continued Operation

While you create a plan to get on top of your invoicing (accounts receivable) and cash flow, there are a number of business financing options that can help you keep your bills paid and your business running smoothly.

Bank Loans

Traditional bank loans or small business loans are accessible to established businesses with a strong financial history. These loans offer a variety of terms to meet your unique needs. They are not ideal for circumstances when you need cash fast, as the application and approval process can take quite a bit of time.

Merchant Cash Advances

A merchant cash advance (MCA) is an easy was for businesses to access a lump sum of cash quickly. Businesses with proven credit and debit card sales can borrow against future sales from an MCA company. The provider then collects the borrowed sum as credit and debit sales come in. The amount you’re allowed to borrow is based on the amounts you’ve billed in past months on cards. Interest is usually quite high on an MCA and there can be large fees involved, since MCAs are not regulated as traditional loans are.

Business Credit Cards

Using business credit cards to pay bills and handle day-to-day expenses is a common solution for cash-strapped businesses. While the interest rate might be higher than a loan, credit cards are much easier to obtain. In fact, it’s a good idea to open a card in your business’ name and use it responsibly whether or not you actually need it to build credit. And, a business credit card is always helpful to have in a financial emergency to keep your company operating.

Invoice Financing

Invoice financing (or factoring) is a practice wherein a business sells its unpaid invoices to a factoring company at a discounted rate. In turn, the factoring company gives the business cash immediately, usually about 90 percent of the invoice summary report total. The factoring company then moves forward with the invoicing follow-up and collects the outstanding amount. Invoice factoring is ideal in situations where you need cash quickly and you just don’t have the resources to continue coercing delinquent clients to pay.

Cash Flow Loans

While most types of secured loans are backed by tangible assets, cash flow loans use expected cash flow as collateral. This manner of funding can be either long- or short-term and is intended to finance working capital. A cash flow loan can open the door to lending for a business without a great credit score or a lengthy financial history. Since a cash flow loan is secured, interest rates are a bit lower than more traditional loans.

The Final Word: Dealing With Unpaid Invoices

Overdue invoices can be challenging for small businesses, as they cripple cash flow and siphon valuable resources. By investing in an accounting system or invoicing software that automates this process, businesses can save time. All companies should have a schedule of procedures in place to stay on top of overdue invoices and minimize efforts spent on client follow-up. If communication by internal employees is non-effective, a business may need to employ legal action or a collections agency.

Unpaid invoices can damage a business’ financial future and destroy vendor relationships. Don’t allow your business to begin missing payments because your clients are missing theirs. A number of financing choices exist to help your company bridge a cash flow gap and remain operational as you wait for customer payment. Merchant cash advances, business loans, and invoice factoring are just a few of these to consider. Not sure if you’re eligible for these borrowing options? Get your free business credit scores to determine what type of financing you can obtain today.

This article was originally written on March 3, 2020 and updated on October 7, 2022.

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