How to Handle Clients Not Paying Invoices

Unpaid invoices can be a huge source of frustration for businesses. They can disrupt cash flow because expected payments aren’t coming in on time. Your supply chain can also be impacted if your own distributor is expecting payment.

Fortunately, there are steps you can take to recover and settle overdue invoices to keep your cash flow on track. In this guide, we’ll take you through each step, as well as what you can do to try and resolve things in a professional manner.

Why clients don’t pay: Understanding the root causes

So, why do many businesses end up battling with outstanding invoices?

When a reputable business doesn’t pay its invoice, it usually isn’t because they have bad intentions. In most cases, there are underlying reasons at play that cause a buyer to miss a payment. These include:

• Issues with cash flow: Managing cash flow is a tricky balancing act, particularly for large businesses with several operations and departments. If your client isn’t keeping a close eye on its payment schedule, they might end up with a large number of payments to make at the same time. This can mean they need to push back your invoice to keep their own finances steady.
• Administrative errors: Simple admin errors can cause disputes and payment delays. For example, you might forget to put payment terms on the invoice. Or a client may have entered your payment details incorrectly. They may not have even received the invoice if the email address was incorrect. These issues can be frustrating, but they’re also easy to fix.
• Dissatisfaction from the client: A client may feel as though you failed to deliver on what you promised in some way. Perhaps there was an issue with the product they received, or they believe the service did not help them reach their goal.
• Financial hardship: Your client might be experiencing severe financial difficulty and is simply unable to pay outstanding invoices, even if they want to.

These issues are all valid reasons, but they still don’t negate the fact that you need these unpaid invoices to be settled as quickly as possible.

Immediate actions to take when an invoice is overdue

If you become aware of an invoice that hasn’t been paid, the most important thing to do is to establish communication with the client. There could be any number of reasons a client hasn’t yet sent you your money. Establishing the reason for the unpaid invoice should be your first priority.

Here are a few actionable steps you can immediately take once an invoice becomes overdue:

• Send a friendly reminder: A simple prompt is often enough to get a client to pay, particularly when the delay is down to an innocent oversight. The reminder should be professional and courteous in its tone.
• Send an overdue invoice: If the initial reminder gets no response, you should look to resend the initial invoice with an overdue stamp attached to it. Doing so will send a clear message to your client that you’re expecting payment, and the overdue stamp will reinforce that you’re ready to take action.
• Attempt to phone the client: If the first two steps are unsuccessful, a phone call should be your next choice. If you are able to establish contact, you should be prepared to compromise a little on the initial expectations and dates, though you should do all you can to make sure that a new date for payment is established before ending the call.

If all three steps are unsuccessful, there may be more serious reasons for the overdue invoices. As such, it’s time to consider escalating the situation.

How to handle unpaid and outstanding invoices professionally

An escalation process for unpaid invoices isn’t the road anyone wants to take, but it can sometimes be necessary to recover your money.

Emotions can begin to creep in at this stage, and while that’s normal, it’s important to maintain a high level of composure throughout the process. Here are some professional, but effective, methods you can use to recover the money you’re owed:

• Negotiating payment terms: Establishing new terms can be a valuable bargaining tool when your client is experiencing financial hardship. Consider allowing them to pay in installments until the outstanding invoice has been settled, and use discounts for early settlement as an extra incentive. While not the perfect solution, this does help to ensure your invoice won’t go unpaid.
• Exploring mediation: If a client is adamant about disputing an aspect of the transaction and is using this as an excuse not to pay, a neutral third party may need to get involved. This step works particularly well if your client is unhappy but still in constant communication.
• Using a debt collection agency: We’d all rather avoid going down this road. However, if nothing else works, debt collection agencies can attempt to recover payment on your behalf. Note that, if they are successful, they will likely deduct a percentage of the fee as payment.

Actions you should not take to collect an overdue invoice

No one likes to feel as though they are being swindled. This is true in life as well as in business.

If your client is refusing to pay what they owe, emotions can sometimes take over. While there may be some justifiable frustration, it’s important to remain professional, as difficult as that can be. There is always a next step to take, but it’s never the answer to resort to anger.

Here are some actions you should avoid when recovering outstanding invoices:

• Open aggressively: Discovered that an invoice is overdue? Try not to begin the retrieval process in an accusatory or aggressive manner. Unfounded accusations will hurt business relationships. Assume there is an innocent explanation for an unpaid invoice before taking further action.
• Threatening behaviour: If a client ignores the initial attempts at communication, avoid resorting to threats to reclaim your money. Keep it professional, and move to the next stage, keeping documentation of each contact attempt.
• Escalating without formal notice: A business must be given every opportunity to settle the outstanding invoices. Give them as much notice as possible, with clear ramifications at each stage of escalation. This will help to avoid potential disputes, wherein your client could argue you didn’t give them fair warning.

When to seek legal action for unpaid invoices

If everything else has failed and you are still no closer to recovering your money, it may be time to consider legal action.

This should be a last resort. Legal matters are often drawn out and expensive, so you should make sure that your business is in a position to manage this for an extended period of time.

Small claims court

The exact process will differ depending on your region. However, most legal routes will involve some form of small claims tribunal or court. Yours and your client’s business model will also impact the type of legal route that is most appropriate.

As the name suggests, this type of court specialises in recovering compensation and smaller amounts of money.

In order to be successful, you will need to prove that you have taken every possible step to settle the outstanding invoice prior to turning to legal assistance. You will also need proof beyond doubt that you successfully delivered your end of the exchange (either goods or services).

Prevent future late payments with better invoice management

If you find yourself in a situation where you are regularly handling overdue invoices, it might be an indication that there is something amiss with your processes.

Some steps that you could look to take to improve your business invoicing practices include:

• Clear payment terms: If you don’t make it explicitly clear when a customer needs to pay you by, plus any applicable late payment fees, they may have grounds to delay payment. Make sure they know exactly when you’re expecting the money.
• Stricter chasing: If a client has been late on payment before, and you were too lenient in settling the invoice, they may feel as though they can get away with missing the deadline again. Make sure that you implement a strict recovery process as soon as the due date passes.
• Updating software: Invoice management can often become untidy if a business continues to use outdated, clunky methods in tracking and reconciling. Consider switching to a cloud-based accounting system to make it easier to keep track of your finances.

How QuickBooks can help you manage unpaid and overdue invoices

At QuickBooks, we understand how vital it is that your business gets paid on time.

With our intuitive and powerful accounting software, you can streamline the entirety of your financial operations into something clear and easy to manage.

Our automated features mean that your clients will receive timely reminders on invoice due dates, and our payment tracking and custom reporting software will give you all the information you need to know what’s happening with your business finances.

Check out our comprehensive package breakdown and see what’s right for you, or contact us today for any questions or queries.