How to Resolve Past-Due Invoices

Accountant businesswoman showing late invoice needing client to pay.

A past-due invoice can cause all sorts of problems for a small business. Late payments not only waste valuable time chasing down the money, but the lost income can also cause a severe disruption in the company’s cash flow. As you know, cash flow is crucial to a small business’s survival. Unfortunately, late payments have become far all too common, which puts many small businesses at risk. A Fundbox survey revealed 64% of SMBs have dealt with  a past-due invoice which caused the following repercussions in their companies:

  • 79% of small business owners couldn’t pay themselves
  • 23% couldn’t hire new employees
  • 23% were unable to invest in new equipment
  • 20% stopped their marketing efforts
  • 18% delayed pay increases or bonuses for employees
  • 17% weren’t able to build their inventory

On the customer’s end, an outstanding payment is no picnic either. Late payments can lead to lower credit scores and the embarrassment of being hunted down for money or being turned over to collections.

The Life of an Invoice

Invoices are born in several different ways: They can get created before the project starts, or the transfer of goods occurs, or come at the end of the sale once the agreement is completed. In any case, the invoice notice informs the recipient of the amount of payment that’s due, when payment is due, and what forms of payment are accepted. It may also contain a purchase order number, a notice of early payment discount, and penalty fees for a past-due invoice.

Once the invoice reaches the customer, it is usually either paid right away or entered into the customer’s system and then scheduled for payment. However, sometimes the unexpected occurs. There may be unforeseen circumstances that can delay payment, or your customer could have simply forgotten to pay. In these cases, the recommended  practice is to act immediately. You want to give customers the impression they need to make their payments on time. .

So, how do  you request payment from past-due invoices? Take a look at  these tips.

Writing the Past-Due Invoice Letter

You’ll likely want to act soon after the payment is late. The definition of late depends on your industry’s accepted practices. You also should consider whether the customer repeatedly pays late or if this is a rare occurrence. Then you need to decide when to chase the unpaid invoice down and politely remind your customer about the unpaid invoice. That payment reminder usually starts with a past-due invoice letter.

The fastest method to send a past-due invoice letter is by email, and that’s become an accepted practice by most customers today. Sending by email also allows you to attach a request receipt, so you’ll know when your customer has opened your email. Be aware the person you sent the message  to may have to approve the read receipt  before you’re notified. You can also send your past-due invoice letter via postal mail, but you’ll be left wondering whether the letter was ever received. Whichever way you send the reminder, make sure you record the date it was sent and schedule how soon you want to follow up. Invoicing programs allow you to automate sending reminders, so you don’t forget.

Next, the letter must contain all the pertinent information about the past-due invoice and payment details, including:

  • A copy of the original invoice
  • Invoice number, date of invoice, and the date you are sending the reminder
  • Details of the service provided or products purchased
  • The amount owed
  • Payment terms, including late fees
  • Payment options
  • The contact person’s name, phone number, email, and hours the person can be reached

Think about the tone of the past-due invoice letter as you’re writing it. You may want to address a past-due invoice that’s a few days to a week late in a polite and understanding tone. If the invoice is overdue, your language in the past-due invoice letter could  be more robust.

The difference between overdue and past-due pertains to time. A past-due invoice denotes the deadline for payment has recently passed, while overdue means an invoice payment is considerably late. An overdue invoice letter needs to convey urgency and relate the consequences if the payment remains in default. Hopefully, it won’t come to this. Still, if it does, think about turning the invoice over to a collection agency and let the customer know that’s one of your considerations if payment isn’t forthcoming.

If you don’t feel comfortable creating this type of letter, search the internet for a past-due invoice email template to guide you through the process.

FreshBooks suggests using polite phrases when corresponding with your customers. Their research shows being polite in your past-due invoice letters can actually help you get paid. Invoices that included terms like “please pay your invoice within” and “thank you for your business” were 5% more likely to be paid. And, they add, you should make sure to include the words “please” and “thank you” in your letter even when the invoice is months overdue. You can also include links to payment options with the tagline: “for your convenience.”

After a month or more, it may be time to toughen your tone. Think about using phrases such as “Action Required” and “Urgent Matter.”

The Phone Call

If your company has sent three or more past-due invoice letters, then it may be time  to make a friendly phone call. Once you get someone on the phone, it becomes more difficult for them to avoid you

You would want to approach the phone call with a positive attitude and the assumption that the customer has either forgotten about payment or is too embarrassed to respond because they cannot pay you at this time. Your company will have a better chance of getting paid if you can come to an understanding, such as creating a payment schedule.

Be ready to accept payment over the telephone and have all the information you need on hand, so you don’t have to scramble. If the person is not ready to make payment at this time, try to find out what the hold-up is. Consider setting up a follow up call in a few days and let them know of any late fees you may charge . Late fees are typically determined by using an interest calculator, which calculates the cost based on the number of days the payment is late.

The Final Push

If you believe payment is not forthcoming, you need to decide whether you want to send the past-due invoice to a collection agency and report the customer to the credit bureaus. If it’s gone this far, you’re likely to lose the customer for good, but you may not want to continue to do business with them anyway.

In any case, because late payments are common when running a small business, it’s crucial to have a backup plan, so your cash flow isn’t seriously disrupted. Securing a business line of credit ensures you’ll have cash on hand in case of serious shortfalls. A line of credit gives you access to the capital you need and the confidence to handle late payment challenges without breaking a sweat.

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Tags: Invoice Factoring