Knowing how to prepare for and address unpaid invoices is something every business has to deal with eventually. Having a signed agreement on paper does not automatically mean that your customers will pay what they owe.
You may complete sending invoices and find that deadlines pass and customers are either unable or unwilling to pay.
Despite making promises, some customers usually need help redeeming their debt. In the end, you find that your business suffers from low cash flow, and working on new projects becomes difficult. The low rate of cash inflow makes it difficult to make new investments and cover operational expenses.
An unpaid invoice is an invoice that shows overdue or outstanding payments. Invoices usually carry an expiration date by which customers are expected to have made the required payments.
Unpaid invoices simply mean that customers have yet to pay for products or services even after the payment deadline passes.
Unpaid invoices and invoices that are overdue must be carefully handled. Inability to do so can damage the relationship between you and your customers when it comes to collecting your rightful payment.
And when you decide to follow up with clients with reminder calls and emails, you risk aggravating them further. More so, following up with customers to pay off their invoices can distract you from other major tasks in your business.
Furthermore, when cash flow into your business is cut off because of overdue payments, you risk missing out on many opportunities. Your ability to get your customers to pay on time ensures the sustainability of your business.
The process of handling unpaid invoices is quite wearisome. However, there are a few things you can do to reduce the incidence of dealing with late payments. The following are some of the proactive approaches that are effective in preventing unpaid invoices:
When your customers can pay off their invoices on time, the sustainability of your business is guaranteed.
One way you can prevent handling unpaid invoices is to run a credit check on all your clients. If you find that a customer has a history of paying late or bouncing checks, you can reduce their invoice terms.
Past payment behaviours of clients can be found in your business’ trade references. So, keep a close eye on signs like unsigned checks and skipped payments with your existing clients.
Those who do not pay on time can be sent payment reminders or called to receive the payment. This is to ensure a continued relationship with them.
If you want to receive payments from your customers on time, you can set payment policies and terms at the start.
Before you agree on a project or deal, make sure your clients have a good understanding of your timeline for payment. They should also know if late payments call for penalties, accrued interest, or other policies.
These policies should be written out in a way that prevents any kind of misinterpretation. Any agreement you sign with customers should have the following information included in them;
The above items must be clearly included in a written agreement, and your customers should willingly sign to avoid confusion.
Therefore, the agreement serves as proof that it will be binding against your customers when they don’t follow your terms. They are also very effective when legal action becomes necessary.
You can tell your clients to pay a specific percentage of the total amount before the project starts. This also applies to the sale of products; customers should pay a certain sum before the product is shipped. This is very effective for small businesses that usually have financial restraints.
When you collect payments in advance, it gives you an edge and saves you the trouble of dealing with unpaid invoices. Many businesses prefer full advance payments to ensure that customers pay. Others require you to pay 50 percent of the total amount as a down payment.
You can also employ the same technique: ask for a percentage of the full payment before the project starts. Then, agree on a certain date when the balance of the payment will be paid.
Another way to ensure that you get your payments on time is by sending your customers’ invoices early. When you send an invoice before the project is complete or before products are delivered, you may get prompt payment. Your chances of getting paid are higher when orders are still fresh in the minds of your clients.
One effective method of preventing unpaid invoices is to provide an easy means by which your clients can pay. Digital technology has made various payment options available.
You can take advantage of those digital payment methods to provide payment options to your customers. This will make them more eager to pay you on time.
Another way to ensure you receive payments on time is to grant your clients discounts for early payments. When your customers know that they will receive a discount for paying early, they’ll be more likely to pay on time. And in the long run, you will end up building loyalty among them.
The following are some measures for handling unpaid or overdue invoices;
Sending payment reminders should be your first step in taking care of unpaid invoices. However, sending reminders is an approach to employ when you’re sure that the client doesn’t realize that the invoice is due. It is also an effective approach to apply when customers seem to have forgotten to pay, which usually happens.
A polite reminder to your customers via email, telling them that their payment is due, is effective. It will be better to highlight the amount that needs to be paid, including your policy for late payment.
However, adding a policy for late payments is only necessary when you have one. Otherwise, just sending the terms of payment will do.
You can create a copy of the invoice and attach it to the email so your customers can have a reference. Also include a list of payment options you find acceptable, including a payment link to speed up the process. If the payment isn’t made even after the reminder, send multiple reminders periodically to express a sense of urgency.
If you still don’t get any response from your clients, even after sending payment reminders, move on to calling them. The purpose of the call is to identify and talk about the issues that are hindering them from making their payments. You can even go further and offer them solutions to their issues.
Remember that you must remain calm, professional, and, most importantly, polite while making the phone call. You can lose clients if you approach them with accusations without first listening to their reasons for not paying. This is likely going to happen when your customers have a fair and cogent reason why they can’t pay.
Another important thing to do while making the call is to emphasize the value they get from your products and services. Also, make sure to communicate your interest in continuing your business relationship and collaborating with them in the future.
While dealing with unpaid invoices, it helps to consider that your customer may be going through financial difficulties.
Beyond that, you should be able to judge if their rough financial patch is a habit or based on circumstances. From there, you may consider extending the payment deadline or giving them the option of paying over time.
Customers finding it difficult to pay a large sum of $10,000 may have the ability to pay $400 over 25 months. However, if that option doesn’t bode well for your cash flow, you can suggest a partial payment at first. Later, they can bring the remaining half of the payment.
For instance, you can suggest that the client pay $7,000 initially instead of the full $10,000. And then, you can create some sort of payment plan that you can both agree on for whatever amount is left.
Late fees refer to the additional amount of money that is imposed on a customer for delaying payment. Note that late fees can’t be charged unless you have conveyed your policy on late fees to your customers. But more than communicating your late-fee policy, your customers are not bound by it until they sign an agreement.
In addition, before a customer is liable to pay a late fee, their invoice must carry precise details. The details should be highlighted under the section for payment terms. Like most businesses, you can charge a flat amount as late fees. Or, you can charge a certain percentage of the total amount on the invoice.
For example, say the invoice you sent towards the month’s end was for $2,500, which had Net 30 as the payment term. A Net 30 payment term means that the due date for paying off the invoice is within 30 days. Also, imagine that you set your policy for late fees at 1 percent of monthly overdue invoices.
The daily percentage rate is then calculated by multiplying that 1 percent by 1 out of 30 days, that is, 0.03. Then, let us assume that the customer makes the payment 15 days after the deadline has passed. The daily percentage rate would then be the result of multiplying $2,500 by the daily 0.03.
The answer will then be $75. You then take that $75 and multiply it by the number of days that are overdue—15 days. That will give you an additional $1,125 in late fees.
If you have tried all the options mentioned above and you still can’t get your money, there are other options. One of those options is to completely break any connections or affiliations with that customer. However, that means that you have to write off that invoice as a bad debt.
Most businesses tend to write off the money they are owed as bad debt when the amount isn’t large. However, where there is a huge amount of money involved, you can consider pursuing legal action. If going down the legal path is what you want, you should ensure you have the necessary documents.
You must have a record of everything that relates to the amount you are owed before seeking professional legal counsel. Not only does legal action ensure the payment of your money, but it also shows that your business is serious about non-payments.
The cash flow in your business can be stopped when unpaid invoices aren’t paid. Furthermore, unpaid invoices have the potential to destroy your relationship with your customers. However, if you have set up a working system, you can prevent unpaid invoices.
If you are unable to prevent unpaid invoices, your first step to recovering your money is to send payment reminders. Contact your customers personally via phone when the payment reminder doesn’t prove effective.
If making calls doesn’t work, you can consider extending credit or including extra fees for late payments. If you include late fees and you still don’t get your money, you may consider taking legal steps.
Setting advance expectations can help you avoid the trouble of dealing with unpaid invoices. You can either run a credit check on your customers or set terms of payment. You can also include late fees and policies for early payment discounts and ensure that your customers are aware of them.
All you need is the right kind of information. And you should also know when and how to apply the right strategy. Thanks for checking out how to prepare for and address unpaid Invoices
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One way you can prevent unpaid invoices is to run a credit check on your customers. Others include the collection of advance payments, setting clear payment terms, and agreeing on them. You can also send invoices on time and provide your clients with multiple payment options.
Sometimes, you can send an email to remind your customers of their unpaid invoices and still not get paid. When that happens, wait a week before sending another payment reminder. If that doesn’t work, wait two weeks before sending another.
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