Small businesses that extend credit to their customers hope that they will pay on time, but circumstances arise that may delay payment causing a lot of paperwork and sometimes legal fees if the customer doesn’t pay by the invoice due date. This takes a lot of time and a lot of valuable resources to keep the cash flow coming in while trying to recover their losses. 

You’ve no doubt heard the old saying, “the check is in the mail.” What that means is that the customer isn’t able to pay right now and is trying to buy some time by saying they mailed a check. Unfortunately, as a business owner, you will have to deal with situations like this from time to time. The easiest way to do it is to set up a system for collecting unpaid invoices and let customers know upfront what they can expect if they are late paying. The following are some quick and easy tips for handling unpaid invoices and/or delinquent accounts.

How to ask for payment of past due invoices without losing the customers.

1. Point out invoice due dates

Make sure your customer knows when to send their payment. The due date should be clearly written on the invoice or contract. It should state the date payment is due, and what forms of payment you accept; ie debit, credit card, bank draft, cashier’s check, etc. If you allow a “grace period” this should be spelled out in the invoice or contract (3 business days, etc.).

2. Send a friendly reminder that payment is past due

If the due date has come and gone with no payment from your customer, the next step is to send them a reminder email. Most often it is just an oversight that will be corrected as soon as the accounts payable department is updated. Always remain friendly and polite since you don’t know if the customer intends to pay but merely forgot. The first email should be light and cheerful, pointing out that the payment was due on this date and to please send it as soon as they can so you can update their account. Note the date you sent the reminder and give them a week to respond back. If there is no response, send a second reminder worded a little more urgently. Remember to stay polite and professional in all of your business dealings with customers. 

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3. Send unpaid invoices marked “Past Due”

The customer may miss the first invoice if he or she has been out of the office for a while. Sending the past due invoice again, this time with the words,” Past Due” to get the attention of the customer. This one should be mailed to ensure that to gets to them as it may go through other departments before landing on the customer’s desk.

4. Impose a late payment fee for past due invoices

If you have sent reminders and the customer still has not paid, you can impose a late payment fee as stated in your contract. People are often motivated by the loss of money and adding extra fees to their bill will often do the trick. You can set the first one as a notice that you will be imposing a late fee for every day the invoice remains “unpaid.”

How much interest can you charge on past due invoices?

You can charge interest, up to 10% in most states, on an unpaid invoice but only do so when you have a contract or agreement in place. Otherwise, there is no legal obligation for the client to pay the additional fee and it may make it even harder to collect from them.

5. Make a courtesy call for past due invoices

In the event they have ignored your written request for payment, the next order of business should be a courtesy call. A friendly voice reminding them that their payment is overdue may motivate them to get out their checkbook. Also, if you speak to the customer in person, they may tell you why they have not sent the payment yet (illness, death in the family, other) and you may be able to work out a compromise for extenuating circumstances. It is always preferable to work things out with your customer and maintain the relationship.

6. Accept a partial payment for unpaid invoices

If your customer is having trouble paying the amount in full it might be better to accept a partial payment with the balance due at the end of the month. This allows the customer to pay what they can on the account now and the rest when their cash flow increases. It also allows you to maintain good terms with your customer. It is at your discretion to accept a partial payment but it is better than no payment at all, especially since you need funds for operating as well. Your customer will appreciate you being willing to compromise with them and you will gain their trust.

7. Offer alternative methods of payment

If your business does not have credit card processing software it is recommended that you get it. It makes accepting credit card payments easier and customers appreciate the convenience of being able to pay with their card instead of writing a check or making a trip to the bank for a Cashier’s check. It does come with an added monthly fee, but it is worth the convenience it offers.

You could offer to set up Auto Pay so your customers get billed automatically and the payment is withdrawn from their bank and it is one less thing to have to worry about.

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What to do if customers resist all requests for payment

Discontinue services

When a customer ignores all attempts to get them to pay you can assume that either they do not have the funds or they don’t intend to pay. In this case, you can do what a lot of other service-based businesses do and that is to discontinue service until the account is paid in full. If you don’t pay your electricity bill you get shut off, and if you don’t pay your water bill they turn you off as well. The only way to restore service is to pay the unpaid amount plus the late fee. If their business relies heavily on your service to them this may be just what they need to motivate them to pay up.

Send a certified letter

Things are getting serious now and you may need to have your lawyer draft a formal demand letter. Sending a certified letter is a step below legal proceedings. It is a formal demand for payment prior to beginning legal action. It tells the customer that if they do not respond to this notice by paying the unpaid balance it will prompt further action to take place. The letter will require the customer or whoever collects the mail to sign for it, proving that they received the request. Oftentimes this is all that is needed to wake the customer up to the seriousness of the situation. Legal fees can devastate a struggling business and this is something they will want to avoid at all costs.

When should your business consider handing the unpaid account over to a debt collector

If you have done all you can to collect from your customer with no success, it may be time to call in reinforcements. Putting the unpaid debt in collections may be what is needed. Collection agencies are experts at getting money from non-paying customers. Debt collectors make their money based on a percentage of what they collect for you. They may have a minimum or standard fee as well.

How to submit an unpaid invoice for collections

Hiring a collection agency for debt recovery should be the last resort to collect payment. Why? Because they are good at convincing customers to pay, they don’t always collect 100% of the debt and there is their fee, which eats into the recovery amount. It is a common practice for collection agencies to tell customers that they can pay off the debt by making a discounted payment. Again, the idea is that any payment at all is better than none.

You will be asked to sign an agreement allowing them to collect the debt for you. This will also show the fee that you will be charged from what they collect for you. They may also buy your invoice and give you a payment upfront. The collector then takes the debt off your hands and treats it as if the debt is owed to them.

When should you report your delinquent business customers to credit bureaus?

To report a customer for an unpaid invoice you just need to be a member of that credit agency. Dun & Bradstreet, Experian, and Equifax are the major business credit bureaus that are responsible for calculating credit scores. 90 days is an acceptable time frame to report unpaid debts. You can also register a complaint with the Better Business Bureau if your customer is a business or corporation. It may take some time for these uncollectible accounts to show on a customer’s credit file.

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How unpaid invoices can hurt your business

The best thing you can do for your business is to invest in business management software. It will automate some of these processes for you and help you stay on top of customer’s invoices. Unpaid invoices can damage your financial system and strain relations with vendors. If you have late-paying customers employ some of the methods above and get some alternative funding in the meanwhile to help until those payments come in.

5 easy ways to increase cash flow when customers don’t pay

Since you are a small business that understands the importance of paying your invoices you don’t want to risk running into the same trouble yourself. If you are having trouble collecting from your customers it will be hard for you to pay your vendors. Since you don’t want to get on bad terms with your creditors, here are some ways to create a little cash flow until you recover some of those outstanding invoices.

Supplier trade credit

Supplier trade credit is one of the largest sources of short-term financing for small businesses.  As with trade credit, suppliers provide customers with the financing for the purchase of goods and services without the need to pay upfront.  If you have a good relationship with your suppliers and vendors, it might be advisable to consider working with them to renegotiate payment terms. 

Invoice factoring

If the number of unpaid invoices are piling up, you might consider using invoice factoring to help unlock the cash.  Invoice factoring is the process of selling your invoices to a finance company in exchange for a percentage of total invoice value as cash upfront, typical around a range of 80-95%.  Once the finance company collects on the invoices, it will give you the remaining amount less the fees.

Business credit cards

Many business owners will choose to pay their bills and operating expenses with their business credit cards. If used wisely, credit cards can help you pay what you owe and keep the business going until more funding comes through. Be careful though, the interest fees are higher than most bank loans. If you have a business credit card for emergencies, now is the time to use it. 

Merchant cash advances

A merchant cash advance is a lump sum of money given in exchange for a portion of a company's future sales. If your business has good credit, you can borrow against your future sales from a company that handles merchant accounts. The amount you will qualify for is based on your sales and revenue for the past 12 months. 

Conventional bank loans

If your company has a solid financial history you may be able to get a bank loan to keep you afloat until your customers pay. You may qualify for a loan or line of credit to help you pay your vendors and keep business running smoothly. The only drawback is it might take some time to get approved. You can expect the process to take 60 to 90 days.

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