How to Handle Unpaid Invoices: 10 Strategies for Success
Collecting unpaid invoices is a necessary chore that most agencies have to face sooner or later.
Whether you’re a multi-million dollar business or a marketing agency, setting aside resources to deal with unpaid invoices takes focus from serving other clients.
A survey by Sage that included more than 3,000 SMBs found that about 30% of businesses experience or expect to experience negative impacts of unpaid invoices.
At the end of the day, you need money to survive, which means unclogging the cash flow.
Here are 10 strategies for how to collect unpaid invoices!
Discuss Costs and Payment Terms Ahead
When you put everything on the table right away, you will set up payment expectations and establish trust for a lasting customer relationship. Make sure the client is fully aware of the projected costs before you get knees deep in the project.
Also, take the time to answer any questions regarding paying upfront.
This kind of clarity from the very start helps strengthen customers’ trust and commitment to paying the full amount. If your client doesn’t have cash in hand, they can use a credit card. If anything changes mid-project, be sure to alert the customers in real-time so that you are all on the same page.
If you’re sending business proposals, a great place to discuss this is the terms and conditions section. Make sure to cover multiple example scenarios and explain what will happen once there is an overdue invoice.
Will you simply send out payment reminders or will you completely stop working on the project until all fees are paid?
Bill for Work Upfront
If you have reasons to believe that using an invoice system with a certain client is too risky, you should ask for payment upfront before any work starts.
Of course, paying upfront is a two-way street and it’s natural that some clients will be wary.
If you have a clean track record and take care of your clients, you’ll earn more rights to take payments upfront.
If a new client questions your policy, ask them kindly to call any of your clients and ask about your reputation and professionalism.
You can also screen customers by asking for a deposit before you start any work.
Customers who refuse might not be a good fit down the road. This is something that is being proven over and over – If someone has a problem with the downpayment, they will likely have problems with future invoices.
Follow the Procedure and Send Friendly Payment Reminders
When you have overdue invoices, don’t jump to conclusions and start sending threatening emails. Make sure you follow the right procedures for getting paid.
Here’s a quick checklist:
- Were payment terms clear?
- What is the due date?
- Did you send it to the right person?
- Is your address correct? And the payment details?
Finally, keep in mind that sometimes unpaid invoices slip through the cracks. A client might be dealing with an emergency or doing business out of town.
About 34% of delayed payments occur just because the transaction is pending.
So before you get ornery, send a friendly reminder and a polite follow-up email.
In most cases, that’ll get your invoice paid and everybody wins.
At this point, there’s no need to make any “past due” remarks or use harsh language. Keep in mind that you’ll want to maintain a good working relationship with the client and that one unpaid invoice might only be an oversight.
Offer Discounts and Charge Penalties
By offering a discount for early payments, you can encourage customers to pay ahead of the due date. It’s common to offer a 1-2% discount on the total invoice if clients manage to pay it in full within 10 days.
However, not everyone is motivated by the carrot. They might be motivated if you include a late payment fee in your invoice. These will prompt clients to pay sooner, but also help you take care of any financial issues you have at hand.
If you currently don’t have a late fee statement on your invoicing form, think about sending your customers a notice letting them know you’ll be introducing this policy on all future invoices.
Lose the Stiff Business Approach
So you followed the procedure correctly and the friendly follow-up didn’t work.
Instead of being all official and authoritative, you may want to abandon a stiff business approach and write an email expressing how you personally feel.
At the end of the day, business is business, we do business with people.
Choose your words carefully:
- Write something along the lines of how disappointed you are for not being able to get your invoice paid. Mention the work you did for them and point out that it’s not so much about money but a matter of respect and good terms.
- Say that you’ve always been there to sort out any problem they might have.
- Make a subtle remark that if you can’t rely on them to pay their outstanding invoices, even after several reminders, it’s not good for business.
- Conclude by saying that you still want to work with them, but if you don’t see what you’re owed within the next couple of days, you’ll have to think twice about helping them in the future.
You’d be surprised how effective such emails are in collecting debt. However, take caution that such a letter can negatively affect the relationship. So if you choose to go down this path, be prepared never to hear from those people in the future.
If you send a more aggressive message and heathen to pursue legal actions, you need to prepare yourself for a long payment process.
Consider Credit Card Payments for Unpaid Invoices
If you don’t accept credit card payments, you might consider allowing them, especially for clients who struggle with timely payments. If your client doesn’t have cash in hand, they can use a credit card to complete the transaction.
A worldwide survey shows that most companies offer credit card payments for B2B purchases.
A credit card charge comes with a small fee, the amount is worth more than the time you spend pursuing the payment.
If possible, you can treat your service as a subscription for your client. This way they can give you permission to automatically bill their card each month.
If they agree to this, the credit card fee will definitely make up for the time spent chasing an unpaid invoice.
Reach Out via Text
If you have unpaid invoices still outstanding 5 business days after a friendly reminder, you should try to contact them via text message or social media.
Get your client’s phone number or track them down on LinkedIn and send them a direct message. You can use the same one as described above.
This approach works because it gets another person involved – the one managing the social media. In most cases, these people are instructed to bring all operational issues to someone in their department.
A small business owner, on the other hand, may not have someone keeping an eye on their social media presence.
This is why a text message is a viable option, too.
Just keep in mind never to reach out to someone regarding an unpaid invoice on social media publicly. You don’t want to tarnish their reputation. If nothing else, you may still want to work with this client or use them as a referral.
Make a Phone Call
Talking to a non-paying client on the phone is another trick you can use to compel them to pay the invoice. In some cases, a personal touch is all it takes to convince a customer that their outstanding payment is affecting your business.
A study by the University of Michigan revealed that college students today have 40% less empathy than their counterparts 20 or 30 years ago – which they believe is related to the use of screens to interact with others.
In this sense, reaching out to clients by phone creates a much more personal feeling. A phone call might reveal the reasons for missing payments and let both parties work together on an acceptable solution.
Remember, you want to speak to your client directly, so you need to call when they just open. This way they can’t justify being super-busy to talk to you.
If you still haven’t asked your client why they haven’t honoured the invoice, now’s a good time to do it. Make sure to remind them that you have multiple paying options.
If a customer is having cash flow difficulties and can’t afford to pay your invoice in full upfront, suggest a payment plan. For example, you can negotiate an amount the client can afford, and specify the period over which the instalments will be made.
How to react when a customer won’t pay overdue invoices
When a client ignores your emails and calls about past due invoices, and doesn’t accept any of the payment options you offered, you have only a few options at hand.
Cut off Your Services
Set a specific deadline when you’re going to cut off your service to them. If your work is vital to their operations, this should get their attention and motivate them to take care of the overdue payments.
You’ll be surprised how fast they can figure out how to pay once they realize how hard it would be to replace your service in a couple of days.
In this case, the best curse of action is to request a timeline for payment and keep following up until the invoice is paid. You can even send your original contract to remind them you’re ready to go further if necessary.
Show the customer that you mean business by writing a demand payment letter. It’s a formal letter that outlines the debt that is owed to you and points out the results if the debt is unpaid by the new due date.
Hire Outside Help
If even cutting off your service doesn’t give results, it’s time to call for backup.
Sometimes handling unpaid invoices requires you to hire a debt collector. For many small businesses and agencies, putting an outstanding invoice in collections is the only way to get paid once all the options are exhausted.
Consider this option if you’re busy chasing people endlessly after giving them more than enough warnings and chances to make right.
Debt collection agencies specialize in recovering payments that are typically more than 90 days past due. Their service includes following up with the customer and using proven legal tactics to get the other party to pay.
The Collection Bureau of America report shows that the average debt recovery is around 20%.
Keep in mind that they are paid a percentage of what they collect and sometimes charge a fee.
If you urgently need cash and can’t rely on a customer to pay up, you can use a factoring service to help you get the money you need while the invoice goes through.
So how does factoring work?
You can sell your accounts receivable to a factoring service company for a certain percentage of the account’s value – typically 70 to 90%.
The factoring company forwards you the money in a few days.
Once your client pays their invoice (now directly to the factoring company) you get the rest of the money, the remaining 30 to 10% minus the factoring agency’s fee.
It’s important to know that factoring services are not collection agencies. They run a credit check on your customers before agreeing to purchase their invoices.
Here are some of the perks of using a factoring agency:
- You close the financial gap when you deliver the service and when the payment is due. You lose some money through fees, but it might be worth overcoming a shortage of cash.
- Factoring companies usually move faster than banks and other traditional lenders, which is great if you need a quick cash boost.
Unpaid invoices are like hail or a swarm of locusts – crippling the cash flow and eating away valuable resources. Shield your business from these plagues by setting up a firm procedure for handling unpaid invoices.
Bear in mind to communicate with clients throughout the process. Keep your messages clear and positive, and most importantly, make sure they are delivered to the person who can take action.
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