How to Collect Unpaid Invoices

Last Updated April 10, 2024

You’ve been working hard for months, maybe even years, to build your business and take good care of your customers. But regardless of how committed you are to fostering these relationships, it’s not uncommon for them to fail to abide by payment terms and allow invoices to become overdue. You may then be left wondering how to collect unpaid invoices from these valued customers in a professional, kind manner.

Knowing how to collect outstanding invoices is a crucial aspect of running a successful business. And while customer payment problems are an unfortunate reality, there are many ways to go about this situation.

As a business owner, knowing how to get paid as soon as possible has a significant impact on your cash flow. But you shouldn’t allow customers to dictate your cash flow. Therefore, continue reading to learn more about how to professionally manage slow-paying customers.

Step-By-Step: How to Collect Unpaid Invoices

You should do your best to standardize your process for collecting overdue invoices. Each situation will require slightly different approaches, but this step-by-step guide for outstanding invoice collections can be a good baseline formula to follow.

1. Have a Simple, Organized Method for Identifying Overdue Invoices

The first step to collecting unpaid invoices is diligently monitoring payment progress. Why is this so important? Well, imagine two scenarios.

Scenario A is where a business owner has an effective tool for tracking payment status (perhaps thanks to AR automation software) which alerts them that an invoice with net 30 payment terms is nearly overdue. After reaching out to the customer and failing to hear back, it becomes overdue. On day 31, they reach out again, issuing a new invoice with their late fees implemented. The customer sees this prompt email and urgently pays the invoice. By day 32, payment is processed and hits your account.

Scenario B involves a disorganized business owner who hasn’t prioritized AR management. Upon reviewing customer accounts, they realize that an invoice from last month with net 30 payment terms went unpaid. By the time they reach out to the customer and payment is eventually completed and processed, it’s 45 days past due. That means it took 75 days to receive the funds since the goods or services were provided.

Now, for small business owners, the difference between going 32 days unpaid (scenario A) and 75 days unpaid (scenario B) can be monumental pertaining to cash flow. Considering cash flow problems are the reason so many small businesses struggle, it’s imperative to prioritize AR management. Whether it’s through software or another solution, you need to know your books like the back of your hand.

2. Send a Polite Reminder to Your Customer

A good relationship between a seller and buyer involves proactive and clear communication. It’s important to reach out to your customer before an invoice becomes overdue, reminding them of potential consequences for paying late. Maybe they simply looked over your initial email, or they had an especially busy period and forgot to pay. Make sure you give them more than one chance to pay on-time.

Related: Email Templates You Can Use to Politely Ask for Payment

3. Send an Updated Invoice (Possibly with Added Interest or Late Fees)

If they don’t respond after giving it a few days, you should be prepared to reach out once more with an updated version of the invoice. This new invoice might have an additional late payment fee or additional interest.

You might not feel inclined by this point to issue late fees, especially if the customer is incredibly valuable to your company and you don’t want to risk jeopardizing their business. Ultimately, it’s up for you to decide how strict your late fee policy is. If you do decide to enforce late fees on invoices, make sure that’s clearly outlined in the contract. Regardless, remain professional, but make sure you’re straightforward in your messaging. 

4. Ask Why They Are Not Paying

Once you issue the updated invoice, give it another few days before reaching back. If by then you haven’t heard from your customer or they provide an excuse for not having the funds, it’s time to ask for more clarity. Politely ask them if there’s a reason why they aren’t able to come up with the sufficient funds. Hopefully, you have a good working relationship with your business partner, and they feel they can be transparent with you.

At the least, knowing why your customer isn’t paying can be beneficial moving forward. If they provide valid reasoning (even if displays a lack of responsibility on their end) and you’ve had a good relationship with the customer in the past, maybe you can afford to provide some leniency and give them additional time to pay. 

5. Call Them

Still not hearing back? It’s time to get your customer on the phone. While unlikely, maybe they’ve lost access to their email. What’s more likely is they’re ignoring your emails to bide time until they come up with the cash.

A phone call can definitely be difficult to make when you have a late-paying customer, but it can be a much more effective way to get them to pay their outstanding invoices. While it can be easy for a customer to ignore an email about a late invoice payment, it is much tougher for them to ignore you once you have them on the phone.

Do your best to get someone from their business on the phone, preferably someone from their accounting team if not the business owner or CFO if you’re working with a small to mid-sized business. Regardless of whether or not you’re successful in your efforts, alert them via your conversation or voicemail of potential repercussions if the outstanding invoice remains unpaid.

6. Send a Final Reminder Email Listing Out Potential Repercussions

When you feel as if you’ve reached a point of no return with an overdue invoice, you’ll have to make the decision whether to ump the ante or accept your losses.

If you’ve been working with an employee in the accounting department, the next step might mean reaching out to the business owner. At the least, you should inform them that you will not be doing any more work for them or provide them services moving forward until the invoice is paid. If you haven’t already, you should notify them of your late fees that come with failing to abide by payment terms. It’s probably also worth notifying them of the potential final step—turning the outstanding payment over to a collection agency.

7. Contact a Collection Agency

Sure, if it’s a small amount of money you’re owed you could simply accept your losses and take on the minimal added debt. But you deserve to get paid for the work you provided, and in some cases, it’s worth reaching out to a collection agency to allow them to take over the process. You shouldn’t waste hours upon hours attempting to collect payment from customers if your business is relying on those funds to operate functionally. 

Tips for Accelerating Customer Payment

Here are some ways you can give yourself a better chance at getting paid quicker:

Consider Including Late Fees in the Contract

If you’re struggling with customers who don’t pay their bills, you need to reevaluate your processes to ensure you’re being proactive, rather than reactive. The process actually begins before the work gets started, when writing up your contract.

Not only should payment terms be clearly laid out in the contract, but you should also consider having extra an interest charge or late fees in place to encourage customers not to pay late. Adding an interest charge can incentivize even the most prolific late payer to deliver payment on time. And if not, at least you’ll be compensated for the late delivery.

If there’s no repercussions for not paying on-time, or if contract terms aren’t at all clear, your customers might not have a sense of urgency. If they’re aware of the late fee before they neglect to pay for an invoice, they’ll think twice about it, making sure your payment arrives on time.

Keep in mind that it’s important to mull over how strict you want to be when enforcing these additional charges and which customers they’re applicable for. Blake Rutledge, Chief Financial Officer at Kruze Consulting.

“It’s always good to have some sticks and carrots in your contracts,” Rutledge said. “But let’s say this is a customer that you want to keep selling to over and over. Routinely jabbing them with a little extra interest charge—is that the sort of relationship you want to have? That’s something you need to consider, and you need to be careful around it.”

If you’re dealing with a customer making a one-time purchase, it’s probably worth adding some of those extra charges. However, if it’s a recurring customer, that might be an instance where it’s worth reconsidering your penalties.

Give Them Time to Fix the Problem

It can be frustrating when your customers don’t pay you on time, but it will do more damage by acting too quickly. This is why it’s best to give them several days or weeks to sort out any issues that may have come up with their payment before you take any action yourself.

This way, they’ll be able to discover what went wrong and fix it instead of getting stressed about an invoice that maybe they haven’t even seen yet. It’s best to not jump to conclusions when you might not know the whole story.

Offer Multiple Payment Methods

Nowadays, the most popular way to pay for products and services online is by using credit cards. It’s fast, efficient, and doesn’t require any paperwork or extra steps that might slow your process down.

However, another great way to ensure that customers don’t neglect to pay you is by allowing them to use other payment methods, such as direct bank transfers or even cash on delivery. The more payment methods you offer your customers, the less chance of them forgetting about your invoice and needing a reminder.

Send Automated Reminders

The first couple of months after your customer gets their hands on your product or service should be a honeymoon period—a time where they’re happy to pay and continue doing business with you. But as the weeks go by, their interest might start to dwindle, and all of a sudden, they don’t remember what you’ve done for them over the past months.

This is why it’s essential to set up an automated payment reminder system to ensure your customers never forget about their outstanding invoices and allow you to take care of it before things get out of hand.

The simplest way to do this is by sending an email on a specific date each month that notifies them that their payment is due soon and that after X number of days, the invoice will be sent automatically. This way, you can continue focusing on finding new customers and taking care of them instead of worrying about getting paid on time.

Encourage Customers to Set Up Automatic Payments

If there’s one way to ensure that you always receive your payment on time every month, it is by encouraging customers to set up automatic payments. This means that they can automatically pay for an invoice instead of forgetting about it and neglecting the payment in the future.

Not only does this process help in reducing errors and misunderstandings, but it sets an excellent example for other customers who might be interested in doing business with you, too.

Offer Early Payment Discounts

If you do incorporate late fees in your contracts, a sort of customer-friendly counter to that is an early payment discount.

Early payment discounts encourage payors to pay invoices quickly because they’re getting a discount for your goods or services. Who doesn’t like saving money for something as simple as paying an invoice on-time?

Early payment discounts can come in many different forms. If you’re working on net d payment terms (net 15, net 30, net 45, etc.), a few of the most popular discounts include:

• 1/10 net 15
• 1/10 net 30
• 2/10 net 30
• 2/10 net 45

If you’re unfamiliar, let’s use 1/10 net 30 as an example to explain how it works. On these terms, a 1% discount is added if the customer pays within 10 days of the 30–day period. You can see how this translates to 2/10 net 30 (2% discount for paying within 10 days of the 30-day period) and so on.

Consider Invoice Factoring

Invoice factoring is a great way to collect all of your unpaid invoices at once. Factoring involves selling your outstanding invoices to a third-party factoring company, who will then assume collection responsibilities. Once you send the factoring company the invoice, you are advanced the majority of the invoice value (typically 80-90%) within 24 to 36 hours. Then, once your customer pays the invoice, the factoring company releases the remaining value of the invoice to your business, minus a small factoring fee.

Factoring is a particularly common solution for small business owners who might be struggling with cash flow or working capital. The immediate cash flow and working capital boost is generally greatly helpful for business owners who choose to factor their invoices.

In-Summary: How to Collect Unpaid Invoices

Don’t allow unpaid invoices to drive a wedge between you and your customers. Instead, take care of outstanding invoices professionally by following these simple steps so that nothing is left up in the air from the start. 

By being open and transparent about your pricing, sending automated reminders around when payment is due, being as transparent as possible with your customers, and offering multiple ways for them to pay you, you’ll be ensuring that your customers are happy with your service even if they don’t pay on time.