Maintaining constant own cash flow is the most important aspect of any business. In other words, cash flow is the heartbeat of any business. Getting paid on time, cash flow problems, and dealing with unpaid invoices are the biggest challenges every company has to face. Other than that, you have to pay employees and pay your own bills too. All of these challenges build pressure on the overall payment cycle.
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No matter what size of business you are having, unpaid invoices cause inconvenience for all small to large companies. Whenever you are planning to start your business’s strategies, you need to make sure you make a solid plan in place so that past-due invoices can’t harm your business. To tackle unpaid and overdue invoices with care, we are going to discuss some successful strategies for dealing with such invoices without harming your working relationship with the client.
Follow the Procedure and Take Follow-up Politely
Do not jump to conclusions without knowing the reason for delayed payment. Many business owners make the mistake of sending abusive emails when they see an unpaid invoice. This is not the right way to deal with the client. First of all, you need to calm down when you see an unpaid invoice. Then, make sure that you are following the correct procedure to get the invoice paid on time. Here is the checklist that you can follow:
- Did you send the invoice to the right customer?
- Is the address the same as given by the client?
- Is the amount due date highlighted in your invoice?
- Were the invoice payment policies and conditions clearly mentioned?
- Did you include links for making the payments?
It will be extremely embarrassing for you to lose your temper with the client while the fault is yours. You always need to keep in mind that there must be a reason behind every unpaid invoice. A client may be dealing with an emergency, out-of-town or they are in a financial crunch.
Before getting angry and start yelling, you need to send a polite yet effective follow-up email to check out the reason. You can check out the previous blog; Most used effective email templates for chasing payment, in case you do not have any idea of sending follow-up emails.
Sometimes phone calls tend to be more aggressive, but also more effective at a time. A client may discuss their reason over the phone and might hope that you will trust them. However, you may not have written records of the call or a recording that you can legally prove as a conversation.
You need to be very careful that you are speaking to the right person over the phone. If you are going to disclose any confidential professional or financial details over the phone make sure you are talking to the right person. Failure to do so can possibly result in legal outcomes.
Following the right procedure with politeness will ensure that you will have good working terms with the client in the future as well and unpaid invoices will become just an oversight.
Important Note: Make sure you take help from the top invoicing company that helps you track the invoices and send automatic payment deadline reminders.
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Charge a Penalty or Give Discounts
Many small businesses offer massive discounts on early payments and encourage their clients to pay ahead of the due date. For example, a UK-based company offers a 20% discount on the next purchase if the client clears the outstanding balance within 10 days after the invoice has been generated. With this strategy, they get the payment on time and they also open the doors for the next potential order.
However, this tactic doesn’t work for the customers. But, they might get motivated if you pressurize them with the late fee. You can charge them up to 2% as a penalty for paying late. Some businesses charge a per-day penalty fee and also include their customer payment fees for ignoring warnings. Such heavy penalties sometimes make clients realize that they are making a loss by not paying in a timely manner.
This move will also push clients to pay faster. If they don’t pay on time the penalty fees will help you cover the cost of any extra expenses you have made to recover the payment (i.e. hiring a professional debt collector or collections agency). A debt collector usually takes fees for their services, so you need to consider that in your payment collection plan. Important Note: You can offer them an early bird discount before taking up the project so they might get motivated to pay in advance.
Reach to a Business Reporting Bureau
If you are dealing with a client who is completely ignoring all your reminders and warnings, as service providers you can report them to a business reporting bureau and make a complaint about the public records. This complaint can threaten the client about their reputation, and may limit them from getting credit in the future; it will give you the security that you will get paid immediately. Important Note: Contact the customer and warn them about your move to the business reporting bureau, this move might help you get paid at the same time you warn them.
3 Ways to Avoid Unpaid Invoices
To avoid having unpaid invoices you need to make your payment process as convenient as possible. To have stable and strong client relationships with the client, state all your payment terms and conditions in advance and take a legal agreement letter from the client via email. Lastly, you should know when to stop chasing accounts receivable. It is not worth the time, money, and extra energy just for the $150 invoice.
These three important tips will help you get paid on time and in full more frequently:
Conduct Research on Potential Clients in AdvanceWhen you get the new inquiry from the potential clients, you won’t be able to find out whether a client can make the payment or not. To avoid such complicated situations you need to conduct advanced research on the potential clients until it’s too late. To avoid unpaid invoices as a small business owner, here are the things you can check out:
- Did a client have a limited budget?
- Is it a small company with limited resources?
- Do they question much about the rates and try to negotiate much?
- Are they disorganized from the beginning?
You need to get answers to these questions, these answers will give a little idea about the client’s mentality and help you deal with issuing future invoices. This will also help you set the payment policies and save your work with the clients who tend to disappear with unpaid invoices. If you are supposed to accept a client but need the assurance of the payment, here are a few things you can do to protect your company.
- Collect at least 50% of your project fees in advance – before you start the project.
- Schedule payment milestones during the project.
- Consider working on a trial project to make sure you can collect the payment before making any bigger commitments.
If you can do it, consider working with the companies with a good reputation and paying on time and in full. You can check the commercial credit reports and the credit score of the companies and also check the data from the small claims court. A record from the small claims court will help you with the company’s financing situation.
Have a Legal Contract
For many freelancers, the word “contract” is scary, but actually, it protects their time, energy, and creativity. So, the contract should not be scary and complex for any of the clients or the business owner. Every business should consider having a contract that includes all the project-related policies and late fees for getting paid quickly. You can set your own terms and conditions through the contract. Once you are done with your contract, you need to be sure your client acknowledges and signs the contract. You may have unpaid invoices from this client in the future. That does not mean that it guarantees you will be paid on time. However, it is a legal record from the payment history that the client has agreed to pay your fee. This step will help you during any kind of dispute and when you have to go to the small claims court or hire collection agencies to recover the money.
Be Vocal About Your Payment Terms
Many small business owners simply ignore a lot of unpaid invoices and late payments. Well, this is not the right way at all when you have regular unpaid invoices that need your attention. No one should ignore such invoices because every penny matters when it comes to business. First of all, you need to make sure that such a situation does come at all. Other things that you should consider is your payment terms, such as:
- When do you expect payment: upon receipt of the completed project, within 7 days, 30 days, or 60 days?
- What will happen if they don’t pay on time?
- Do you charge late payment fees or directly send the unpaid invoice to the collection agency?
- What steps will be taken if they stop the project in between?
- Do you accept credit card payments, debit card payments, or bank account direct deposit (discuss payment options)?
Frequently Asked Questions
1. What can I do about the unpaid invoices?
First of all, you need to pay attention to your unpaid invoice. Find out the reasons behind it and then try to chase them by sending gentle payment reminders. If the client still doesn’t respond you can take legal action and even take a harsh decision by hiring a collection agency.
2. How do you collect outstanding invoices?
There are many ways to collect outstanding invoices. The first step is to send reminders. The second step is to make a phone call to the client and find out the reason for the outstanding invoice. The last step is to warn them about the late fees for the delayed payment. If the client ignores all your efforts and still is not ready to pay you can hire the collection agency and take legal actions against them.
3. What is the past due invoice?
A past due invoice is an overdue invoice that has not been paid on its due date. If a business chooses to extend credit to its customers, they need to collect payment for the overdue invoice in the first phase.
4. How do I get past-due invoices?
As a business owner, you need to set the accounts payable due date for every invoice you create. Based on that record you need to tally all the payments you have received for the invoice you have created. If you didn’t get paid for the invoice and if the date is passed then you need to convert that invoice into the past due to invoices. Also, you can try invoice factoring and invoice financing.
5. How do I write an unpaid invoice letter?
Writing an unpaid invoice letter is really easy to write. You need to format an invoice in a way that includes your invoice number, date, the amount that client owes, payment terms including taxes and late fees, reminders of previous letters, instructions for payment (including links), contact details of the concerned person in case of any queries. Or to make it all simple, invest in a reliable accounting system.
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Your terms may differ for the unpaid invoice, and it also depends on project to project. To avoid having unpaid invoices, you need to follow the above-given strategies and get paid quickly. While creating a payment plan for your business you may need to make sure that your client agrees with your payment details so that you won’t have any unpaid invoices on your list.
You can use online invoicing software like InvoiceOwl to create professional-looking invoices and even request payment reminder emails using effective email templates for past due invoices.