What To Do When a Client Doesn’t Pay for Your Goods or Services

Last Updated November 22, 2024

There are a lot of perks as a business owner: you can set your own schedule, be your own boss, and make every decision. But one of the few downsides of running your own business is relying on clients to pay on-time in order to keep your day-to-day operations on track. Even if just one of your clients doesn’t pay for your goods or services, it can cause serious cash flow problems and derail your growth goals.

Dealing with past due invoices is more common than you may think. In fact, 87% of business owners have said they deal with not getting paid on-time.

This means that if you’re a new business owner or in the process of starting a business, you need to know what to do when a client doesn’t pay. What should be your first course of action? How should you approach your client to ask for payment professionally?

What if, after all your efforts, they still don’t pay?

Continue reading to find the answers to these important questions so that you’re prepared to respond accordingly if you become part of the 87% of business owners who deal with chasing late invoice payments.

Steps to Take When a Client Doesn’t Pay

Here’s how to go about the situation when your client isn’t paying for the goods or services you’ve provided:

1. Send a Polite Reminder Before the Payment Due Date

Even prior to the payment deadline, it’s worth your time to reach out to your client and remind them when payment is due.

For example, if you’re working on net 30 terms and it’s day 25, you should email your client and remind them that the payment due date is quickly approaching. Business owners are busy people, so they simply may have forgotten to pay the outstanding invoice.

2. Resend the Invoice Once the Due Date has Passed

Using the above example, if you’re working on net 30 terms and it’s day 31, you can send the invoice to your client via email once more in hopes that it urges them to pay promptly. Mention that the due date has passed and ask them if there are any restrictions holding them back from paying. Maybe your client lost the original invoice or had insufficient working capital at the time of your initial request to make payment.

Resending the invoice could be the reminder they need to fulfill their payment obligations.

3. If No Response, Request Payment More Firmly

If they haven’t responded to your first past-due email, you should reach out to your client and again notify them that payment is past due. If you charge a late payment fee, this could be the time to inform them that the fee is now due in addition to the outstanding invoice payment.

If you deal with a client that regularly makes late payments, you could consider charging a late payment fee. Doing so can encourage your business partner to make timely payments. When ironing out the details of your contract or adding this fee to future invoices, it’s important to give your client a heads up regarding your late payment policy before you begin sending invoices to prevent complications or disputes when you’re forced to put the policy into effect.

However, you may need to send a few overdue payment notices prior to moving to the next step of applying a late fee, according to Angela Petulla, Director of Online Marketing here at altLINE.

“Past due invoices happen more frequently than you may think,” Petulla said. “Sometimes paperwork slips through the cracks and AP departments forget to send payments in a timely manner. Rather than jumping to the worst possible conclusion, it can be better for your business relationship to send a few reminders prior to moving to more extreme measures.”

By this point, your client’s failure to pay may be leading to cash flow problems for your business. Therefore, don’t feel bad about being more demanding in requesting money for your goods or services, in addition to mentioning the late payment fees being enforced if they’ve been applied in the contract.

Obviously, it’s important to remain professional, but let them know that their payment habits are beginning to affect your own business. You can again ask them why they’re not paying or responding to your requests to hopefully get a better understanding of the issue. Perhaps there’s a valid reason, and you can work with your client to find a solution.

4. Draft a Demand Letter for Payment, Reminding Them of Potential Consequences

If your client continues to not respond to your communications, show them you’re not going away. If you’ve given them 30 to 60 days after the due date to pay and you’re still in the dark, consider drafting a formal, professional letter demanding payment. In the letter, include the debt you’re owed along with the next steps if they fail to pay entirely. A possible course of action would include hiring a debt collection service.

Along with the letter, send your original contract, which should include items such as payment terms, late payment fees, and measures that will be taken if they fail to pay for your services.

5. Hire a Debt Collection Agency

If your invoice is months overdue, and it’s become apparent that your client isn’t showing signs of paying, it’s probably time to hire a debt collection agency to assist with the matter. These agencies typically focus on helping business owners that are awaiting payments at least 90 days past due.

A debt collector will take over the responsibility of collecting payments. By this point, your client’s credit score will start taking a hit. Hopefully, their dwindling business credit score will prompt them to finally pay the invoice.

The Importance of Good Communication When Chasing Customers for Payment

Considering how often customers fail to pay on-time, chasing invoice payment is often unavoidable. However, understanding the importance of healthy, transparent communication from the very beginning of the working relationship can not only reduce chances of getting paid late, but it can also bolster the relationship moving forward.

According to Jeff Mains, CEO of Champion Leadership Group, mastering chasing down payment is about finding the balance between persistent outreach to customers while maintaining professionalism to prevent losing valuable business.

“Professionalism and empathy are key in these communications,” Mains said. “I started conversations by acknowledging the valued relationship with the customer, then expressed understanding of their possible challenges. By opening this dialogue, we often found mutually agreeable solutions and reinforced trust with our customers, showing them we’re partners in their success, not just creditors.”

How to Give Your Business the Best Chance to Get Paid On-Time

The best way to avoid having to figure out what to do when a client doesn’t pay is to prevent the situation from occurring altogether. Here are some best practices that successful business owners utilize so they don’t have to chase down customer payments.

Automate Your Invoicing System

Setting up an e-invoicing process can save you time and get your invoices paid more quickly. In fact, according to Chaser, businesses that use accounts receivables software are 3 times more likely to get an invoice paid before the due date compared to those that do not use accounts receivables software.

When using an electronic invoicing system, you can set up automated email reminders that go to your clients, reducing the amount of time you have to spend following up on payments and increasing the likelihood of getting paid sooner.

Use Invoice Factoring

Invoice factoring is a very popular alternative financing solution for small business owners who are at particular risk of slow-paying customers affecting their company’s cash flow.

Here’s a look at how the factoring process works:

1. Your business sells unpaid customer invoices to a third-party factoring company, also known as a “factor.”

2. The factoring company immediately advances 80–90% of the value of each invoice to your business. This typically happens within 24 – 48 hours.

3. Your customer is informed that going forward, they will make payments to the factoring company. The factor then assumes collection responsibilities for the invoices.

4. Your customer submits payment to your factoring company.

5. Once payment is collected and processed, the factor releases the remaining value of each invoice to your company, minus a small factoring fee.

Factoring therefore helps business owners in a few ways:

• Accounting responsibilities are reduced as the factor manages collections for the invoices you’ve chosen to factor (or even your entire ledger).
• Thanks to the cash advance, businesses improve their working capital and are provided an immediate cash flow boost.
• You no longer have to rely on customer payment habits to dictate your cash flow. For example, if your customer working on net 30 payment terms doesn’t pay until day 27, you won’t feel the negative effects of this slow payment. Once you submit the outstanding invoice to the factor, you’ll receive a cash advance within 24 hours.

Have Late Payment Fees in Place

If late payments are a serious issue for your business, consider instating a late payment policy. With added fees for clients who fail to meet payment terms, they will be encouraged to make payments sooner. These fees should be clearly defined in the contract signed by your client before the partnership begins.

Incurring late payment fees should encourage your clients to meet payment terms. If they don’t see a penalty for failing to pay on-time in the contract, they could easily get complacent and feel too relaxed about paying for your goods or services in a timely manner.

Related: How to Charge Late Fees on Invoices

Have an Email Template to Politely Ask for Payment

It’s important to be prepared for precarious situations, such as when clients don’t pay. Late fees might not be enough; you should also have an email template prepared for when you’re faced with the awkward dilemma of what to do when a client doesn’t pay.
altLINE has an in-depth guide for business owners who are struggling with chasing down customers who’ve failed to pay their invoices. These email templates you can use to politely ask for payment prove highly beneficial for many business owners. And though you might initially think of it as fairly monotonous, having pre-drafted email templates can be a huge timesaver in the long run. You won’t have to continuously spend time working out how to draft a polite yet imperative message each time you deal with a frustratingly slow-paying client.

Be Organized

Although this general tip isn’t specific to business owners, staying organized bolsters your chances of keeping money flowing in when it should and staying on top of your finances.

For example, make sure to have a year-end accounting checklist handy to ensure you’ve checked off every bookkeeping task. One of these tasks is to complete the process of invoice verification, where you can intercept potentially costly errors on your invoices. If there was a significant error on an invoice you sent to a client, it could lead to them not paying the invoice or, on a larger scale, strain your relationship.

When it strictly comes to getting paid on-time, organizational best practices include:

• Setting automated (or manual) reminders for clients who owe you money
• Maintaining consistent record-keeping
• Setting clear payment terms
• Ensuring all necessary details are well-defined in the contract or agreement
• Performing credit checks on potential new clients

Focus on Building Your Customer Relationships

After all, arguably the simplest way to avoid tense situations with your clients is for both parties to maintain good, honest working relationships. Customer relationship management should not be overlooked.

A few ways to build solid client relationships include:

• Ask for feedback and implement their feedback to improve their experience
• Be proactive, not reactive
• Personalize their experience
• Show them that your relationship truly matters to you

For example, you can personalize their experience when you’re negotiating payment terms. Perhaps you’ve offered to work on net 15 terms, but your customer has hinted that they may need more time to come up with the cash, countering with net 45 terms. However, you need to look out for your own business, and net 45 terms mean you could go quite a long time without getting paid.

To compromise, you can develop a personalized early payment discount option. An example could be 2/10 net 30.

This means that you would be working on net 30 terms, but if they were to pay within the first 10 days, they would receive a 2% discount. An early payment discount can benefit both parties and ultimately improve the business-to-client relationship.

In-Summary: How to Chase Customers for Payment

Attempting to track down clients or customers for missed invoice payments can be one of the awkward, stressful aspects of accounting.

The most important thing we can stress is to make sure you’re proactive. You can do this by reaching out to customers before they miss the payment deadline, along with nurturing your client relationships. Try to get to know them a bit. People are less likely to dodge payment if they feel like they have a strong relationship with you. You should also have late payment fees in place, so they know ahead of time that failing to pay will have costly consequences.

Unfortunately, you can do everything you can and still be left with a customer avoiding paying for your services. When this happens, remember to stay professional, but be brutally honest in your communications with them. You could always hire a debt collection agency, though doing so can be expensive and should be seen as a last-gasp effort. Instead, draft demand letter for payment and remind them of the consequences of their actions.