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Collecting Overdue Invoices

What To Do With Overdue Invoices

Unpaid invoices can break a business, especially small businesses that rely on a steady stream of cash flow to grow. This article aims to give business owners some direction on what to do collect on overdue invoices, as well as how business owners can mitigate the risks of invoices being late.


 

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The definition of a ‘late invoice’ or ‘late payment’ varies from business to business. It’s important that each business owner take the time to speak with their accountant or financial professional and determine what an acceptable time frame for collecting on invoices is for your business.

Sometimes our clients or even visitors to our website ask us what they can do to collect on late invoices. We’ve created a short list below of a process you can follow when you have a late payment.

  • Send a friendly reminder email to the client, ensuring that you attach the invoice into the email. It’s important to keep a friendly and polite tone, as your client might have just simply forgotten, or perhaps accidentally deleted the previous email; mistakes happen.
  • If the friendly email reminder has no effect after another week, send another email with the invoice attached. This time, keep the email firm, yet professional and warn of possible late fees that the client may face. Included in the email, kindly request that the client call you to discuss the overdue account. (Late fees only work if you have a late invoice fee policy established beforehand!)
  • If both emails fail at getting any response, give the client a call. If it goes unanswered and to voicemail, do not leave a message, instead try calling again a few hours later. If the call still goes unanswered, try the next day. If the call is unanswered the next day, leave a voicemail explaining the reason for your call, urging them to call you back to discuss the account and options.
  • If you have no response at this point, you can consider writing a demand for payment letter, retaining legal counsel, or hiring a collections company. Collections is really a last resort and should be considered the last option available.

To protect yourself from the risk of your invoices not being paid, there are several suggestions that we have that will mitigate your risk. Ideas include:

  • Set early payment expectations. Before entering into any contracts with a client, ensure they are aware of your payment expectations in terms of upfront payments, partial payments, deposits, or invoicing. Your client needs to know how and when to pay you, and what to expect!
  • Set shorter outstanding invoice terms. This is a great option for smaller businesses that might be struggling with cash flow. A net 30 on your invoices cause many businesses to put off paying the invoice for several weeks. If you’re a small business and relay on a steady cash flow for operations, consider a net 0 for your invoices. If you really want to protect yourself, you can consider a ‘graduating’ process for credit. If you have a new client, they could be on a half upfront, half on completion plan for a while, before you extend your credit terms to the client. Remember, be sure that your invoice and other payment terms are explained to the clients clearly!
  • Have a late payment fee and explain your late fee policy. Having this late fee will give you some power you can flex if an invoice has started to become late. When sending your reminder email, you can also remind the client that they will soon incur a late fee on their outstanding invoice! Again, be sure this late fee policy is clearly explained to your clients, and is found on your contracts!
  • Send friendly reminder emails about upcoming payments. This is a great way to keep connected with your clients, remind them that a payment is approaching, while also giving you the start of a ‘paper trail’ in case the account does fall behind on its payments. Try adding a helpful tidbit to each months email to lessen the feeling that the client is being chased for payments; remember they are not late yet! Keep it friendly and useful for the client.
  • Where possible, don’t release files until the final payment has been received. Obviously there are exceptions to this tip, but the concept is to ensure that your client pays for the ‘product’ before taking ownership of it. In a worst case scenario, imagine delivering a project to a client only to never be paid! Chasing that invoice will always be a losing situation, so the idea is to mitigate your risk; try the next suggestion below!
  • Request a percentage of the total invoice amount upfront. For large projects, both in the time investment you need to make as well as the invoice amounts, ensure to ask for a percentage upfront. You can position it as a retainer for service, or a deposit to ensure that your time has been allocated to your client’s project. Being transparent with your client about upfront payments and the costs you are trying to cover while working on the project can go a long way. Your clients will be much more understanding and respectful of your invoicing and payment policies.
  • Set a 3 strike rule for late payments. After 3 late payments (set your own threshold that works!) the client is moved to upfront payment terms. This can be very helpful in keeping you protected against losing out on invoices owed. If you notice that the past three payments have all been late by a few weeks, kindly inform the client that you will require upfront payments for all new projects. It’s far better to have a client walk away because of the need of upfront payments, than chasing a large invoice that you’ll never see a penny for.

 

DISCLAIMER:
THIS ARTICLE deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other
appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or
organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of
liability for its contents or for any consequences arising from its use.

 

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