The Ultimate Guide on Collecting Unpaid Invoices
January 09, 2023
As a business owner, at one point or another, you will have to deal with a client who doesn't pay on time.
So, what do you do when this happens? Well, the first thing to do is to keep your cool. But on a more practical level, there are things you can do to deal with the situation in a professional way.
You might be wondering, should I lawyer up? Do I need to cut off communication with the client? Is there any way to collect the payment without severing the relationship?
Well, look no further. We’ll answer all of the questions above and more in this post. Just keep reading.
What is an Unpaid Invoice?
An unpaid invoice, also called an overdue invoice, is an invoice that has been sent to the client but hasn't been paid yet.
People often think that an outstanding invoice and an unpaid invoice are the same thing, but there is a difference.
An outstanding invoice can be sent to the client before the payment is due. In this case, the payment can still be made on time. But you can't say the same thing about an overdue invoice, the due date of which has already passed.
How to Receive Payment for Unpaid Invoices
Now that you know what an unpaid invoice is, let's talk about some ways to get your payments, even if they are late.
#1. Identify the Invoices
The first thing you should do is look through all of your invoices to see which ones need to be paid.
If you have your invoices organized, you shouldn't have any trouble with this. So, for example, if you have invoices organized by client, service type, month, etc., you will be able to go through them easily.
You will save yourself even more time and trouble if you have a general idea of which client may have been late or which month's payment was late.
#2. Send an Overdue Invoice Letter
Once you know which invoices haven't been paid, you can find the clients and send them an unpaid invoice reminder via email.
Depending on the invoicing software you are using, you could have an option to set-up automatic reminders so an email is sent out X amount of days after the invoices become overdue.
You can then send an overdue invoice letter several days after the invoice due date has passed. So, if the payment was due on the 30th of the month, you can send the letter on 3rd or 4th of the next month.
The letter should have a friendly tone. Make it more like a reminder than a demand for the client to pay.
#3. Send a Final Letter
You can send an unpaid invoice email with a final letter if your client doesn't respond to the first letter or doesn't pay as promised.
In this letter, you can be more firm and insistent because you are owed the money and your kind request hasn't been addressed the right way.
#4. Call the Client
If none of the letters work, calling the client is the last thing to do. Even though it might be hard, you have to do this to get what is rightfully yours.
You can be nice and understanding, but you should also stand your ground and request payment.
#5. Stop Doing the Work
If the payment is late, you don't have to keep working. After they have paid, you can move forward.
You can even put this in your original contract, but even if you don't, you can stop working until you get paid.
If the payment is very late and there's no good reason for it, you should stop working with that client altogether to avoid stress in the future.
#6. Charge Late Fee
If someone pays you late, you can charge a late fee. However, this can only be done if it is written into the original contract.
It's good to have a late payment fee because you never know when someone will be late. This not only makes sure that everything is done as agreed, but it also encourages clients to pay on time so they don't have to pay the fee.
#7. Hire a Collection Agency
If nothing you do works, you can seek assistance from someone else. One option is to hire an unpaid invoice collection agency, preferably one that specializes in getting people to pay what they owe within 90 days.
These companies get in touch with the client, maintain contact with them about the situation, and use certain methods to get the payment.
#8. Legal Action
If the agency can't get the payments, your last option would be to turn to unpaid invoice legal action.
You can hire a lawyer and talk to him or her about how to handle the situation. You could sue the client or take them to court.
But be sure to think about how much such actions will cost. If you are owed a large sum, it may be more worth it than if you are owed a small amount.
How to Prevent Unpaid Invoices
It's important to know what to do if someone doesn't pay your invoices, but it's even better to know how to avoid such situations. So, here are a few things you can do to get paid on time.
Set Clear Terms
Make sure that all the terms of the agreement are clear when sending invoices to your clients.
In your invoices, include information such as the payment due date, how long the customer has until they have to pay, the billing cycle, and what will happen if they don't pay on time, such as late fees, pausing the work, and so on.
Once the terms are clear, there won't be as much room for confusion or the desire to figure it out on your own, which could lead to even more complications.
Get Paid in Advance
If you worry that you won't get paid on time, it might be a good idea to ask for the payment before you start working. You can do this by sending an advance invoice or a deposit invoice for a partial payment.
You also need to explain why you are asking for the prepayment, since clients may not agree with this. One of the most common reasons for a downpayment is to cover project-related expenses, including material and other operational costs.
Allow Multiple Payment Methods
Another good idea is to give the customer more than one way to pay in the invoice. The more ways your clients can pay you, the easier it will be for them to do so.
If you only offer one way to pay, it's likely that the client won't be able to pay you. This could be because they don't know how to use that system or because it will take them time to figure it out, which will delay payment.
To stop this from happening, give them a number of choices. Stripe, Paypal, Crypto, Venmo, Payoneer, Credit Card, Bank Transfer are all common options.
Tips to Consider When Handling Unpaid Invoices
Here are some tips to help you deal with unpaid invoices:
- Always remain professional. When dealing with unpaid invoices, remaining calm and collected will only highlight the fact that you are a professional looking to be compensated for the work you did. It will also aid in keeping the situation under control without resorting to extreme measures such as arguments or even legal action.
- Talk/negotiate with the client. Communication is key in any form of agreement. You should talk with your client and find out why they haven’t paid. The chances are the reasons are valid and understandable, and all that was needed was proper communication.
- Allow a payment plan. When clients don't pay their invoices on time, it's a good idea to set up a payment plan for them. If a client hasn't paid because they are having financial troubles, this will give them a chance to relax and get their finances in order while still providing you with payment.
Business Risks of Not Handling Unpaid Invoices
Businesses can run into trouble if they do not handle their unpaid invoices in a timely manner. Here are some of the risks associated with that:
- Can’t take on more projects. If you don't get paid on time, your cash flow will go down. This means that you may not have the capital to work on new projects. As a result, you won't be able to support the growth of your company.
- Unable to pay the suppliers. If you don't get paid by your clients, you might not have enough money to pay the suppliers for your business. This is likely to hurt your relationship and make it less likely that you'll work together again in the future.
- Facing operational challenges. The lack of cash flow caused by late payments will not only make it hard to take on more projects, but it will also make it hard to keep the business going and make sure it runs smoothly.
- Difficulties with making smart financial decisions. When your payments are late, it throws off your income, which makes it hard to make good financial decisions because you don't know when to expect how much money.
- An unpaid invoice is one that the client hasn't paid even though the due date has already passed.
- Some of the things you can do to deal with overdue invoices are to find them first. Then you can send letters or call the client. In the worst case, you could hire a debt collector or go to court.
- To avoid late payments, your invoices should have clear terms, such as a prepayment or a deposit, and offer more than one way to pay.
- If you don't take care of your unpaid invoices, you won't be able to start new projects, pay your suppliers, cover your operational costs, or make smart financial decisions.