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11 Tips to Collect on an Outstanding Invoice

Image by mohamed Hassan from Pixabay 

Did you know that one in 10 invoices will be paid late? It’s an enormous problem for small businesses everywhere. If you’ve ever dealt with an outstanding invoice, you know how troublesome they can be.

The payment you were expecting didn’t come through. You couldn’t pay your own bills on time.

You had shipments delayed or accounts frozen. Maybe you were lucky and you were able to dip into your savings, or you obtained a loan to float you through tough times.

However, if you’re wondering what you can do to collect on those outstanding payments, these 11 tips will help.

1. Make Sure Your Details Are Correct

Before you do anything, make sure your details are correct. Most customers won’t appreciate your sending a late notice for an invoice they’ve already paid.

You should be sure to note the date the invoice was issued, along with when it was sent to the customer. Take note of the number and the amount as well. If the customer has already paid part of the balance, be sure to note that also.

It is critical to note that if this is your first time issuing an invoice as a business owner, your invoice definition and purpose must be clear. This is important for you as well as for your client, as you need to understand the implications late payments have on your business. After the first payment is made you can implement automated invoice processing, and solve all the human error issues that come with invoicing. 

Next, check the terms of payment. These may have been indicated in your contract.

If you don’t have a contract, then your invoice itself should show the terms. If you used invoice wording for immediate payment, then the client should have paid promptly. On the other hand, your terms could have been 30, 45, 60, or even 90 days.

2. Send a Reminder

Once you’re sure there’s an outstanding payment, it’s time to get in touch with the client.

You’re probably upset or worried at this point, especially as a small business owner or a freelancer. You may not want to risk angering the client.

The best thing to do is approach the subject from a professional standpoint. An emailed reminder within a week of the due date is perfectly acceptable.

In your note, ask the client if they can check on the status of the invoice. It’s possible they’ve already paid you, and it hasn’t arrived yet.

A friendly note at this stage will spur many clients into paying. Like you, they’re probably busy. Your invoice may have been misplaced or the due date overlooked.

3. What If an Outstanding Invoice Slips into Nonpayment?

The next thing to do is determine when an outstanding payment becomes nonpayment. For you, two weeks late might be enough to cause problems.

Generally, though, a late payment transitions to nonpayment within 90 days. Until this point, you should continue trying to work out payment with the client. Follow up through email or by phone.

If you have a contract, it may lay out terms for what counts as nonpayment. It may also give you options to resolve differences, such as arbitration.

4. Work out a Payment Plan with the Customer

What if the customer indicates they want to pay you, but they can’t manage it due to financial difficulty? You have a few options.

The first is to work out a payment plan with the customer. This breaks the unpaid invoice up into smaller amounts, which may be easier for the client to handle.

However, this also means it will take you longer to get paid in full. Moreover, if the client’s financial troubles continue, you might not be able to collect the full amount of the invoice. The upside is that you probably will collect part of what you’re owed.

You could also decide to settle the amount of the invoice for less than what’s owed. While this isn’t ideal for you, it does allow you to recoup part of what you’re owed. Clients who agree to this will usually pay quickly.

It’s a bit too late to check someone’s credit history once they owe you. Instead, assess the client’s history with you. Have they always paid on time before, or are they usually late?

Knowing this can give insight into how you should deal with a payment plan. A client who has always paid on time before has earned your trust and likely intends to pay as soon as they can.

5. Remind the Customer About Interest Charges

Most invoices come with terms about how late payments will be handled. A common method is to apply interest. So, how much interest can you charge on unpaid invoices?

Some states set limits on interest rates. A safe rate is usually considered around 10 percent or so. You likely won’t run afoul of any state limits on rates then.

If your state allows you to set the interest rate higher, you can. However, keep in mind that it’s a good idea to offer an early payment incentive instead of late fees.

If the client has paid part of the balance, you’ll need to use the unpaid balance method to calculate interest.

Keep in mind that your interest rate should be communicated to the client upfront. You might want to include it on the invoice or in the email that accompanied it.

6. Levy a Late Fee on the Invoice

Like charging interest, you can also charge a late fee on an outstanding invoice. This is usually a flat fee or part of the invoice, which is then added to the total.

Some businesses do use both a fee and interest, although many pick one or the other. A late fee can help you cover the costs of tracking down the late payment.

It’s also more guaranteed than interest. Interest must accrue, whereas a late fee can apply immediately after the due date.

7. Put a Hold on the Account

Another way of getting a client to pay an outstanding invoice is to freeze their account. This is particularly useful if the client is continuing to work with you or if they want to order from you again.

However, this move can be risky, as it can alienate the customer. If this is a long-time, trusted client, you might not want to put a hold on the account.

On the other hand, if the client has a poor record of payment or is a new customer, freezing their account is a good idea.

In freezing the account, you tell the customer you won’t ship product or deliver services to them until the outstanding invoice is paid.

This can be an effective method of getting someone to pay you or even negotiate with you. If the client needs your products or services, they’ll try to work out payment a little sooner.

This also protects you from larger losses if the client doesn’t ever pay. Instead of letting them run up an ever bigger bill, ask them to settle before continuing.

8. Check out Some Financial Options

If your invoice is with an institution or business, you might have financial options.

One is invoice factoring. If the invoice is less than 90 days past due, you can sell it to an invoice factoring company. They’ll pay you a percentage of what’s owed.

You’ll still collect the payment from the client, but you’ll need to pay back the factoring company.

Another option is accounts receivable financing. This is different from factoring, in that it’s a form of revolving credit. The lender assesses your accounts receivable, then offers a percentage of the amount as a loan.

Either of these options can help you manage cash flow as you wait for clients to pay.


9. Get Some Legal Advice

If a client remains in nonpayment for more than 90 days, you may wonder about your legal options.

It never hurts to talk to a lawyer. Invoice amounts may not be worth pursuing to court. The legal fees could outweigh what you’re owed.

However, if you’re owed a significant amount, you may want to take the client to court. Also, some business owners feel it’s important to stand their ground. A lawyer’s opinion may help you make a good decision for your business.

10. Send the Invoice to Collections

The client still hasn’t paid. Now you’re wondering how to send someone to collections.

The process is similar to invoice factoring. You’ll sell the invoice to a collections company. They’ll usually pay you a percentage of the balance due.

This is based on their assessment of how likely they are to get paid. If it seems very likely they’ll be able to collect, then they’ll pay a higher percentage.

The older the debt is, the less likely it is they’ll collect. If the debt is older than a year, don’t expect to recoup much.

Unlike invoice factoring, the agency will take over collecting payment from the client. Sending someone to collections is contentious, so only send clients you aren’t keeping.

11. Write the Invoice Off

If all else has failed, you’ll simply need to write the invoice off as bad debt. On the plus side, this counts against your income, so it can lower your taxes somewhat.

One good strategy is to send the invoice to collections and write off the rest. That way, you recoup the largest amount.

Collect Your Dues

If you’re ever faced with an outstanding invoice, these 11 tips can help you collect. These days, with so many clients entering nonpayment, it’s likely you’ll need them more than you’d like.

Running a small business is tough, and cash flow issues can make things worse. However, if you’re looking for the best financial advice and tips, we have you covered.