If your business operates on an invoicing system, you might be familiar with late payments and perhaps even nonpayment. There are many reasons why customers don't pay invoices on time (or at all), from lost bills to unexpected additional expenses that customers realize they cannot afford. Many small business owners struggle with how to best ask for overdue payment without being rude. However, regardless of the circumstances, an unpaid invoice hurts your business. You need to act if you want to keep your cash flow healthy; being candid with customers and having some backup strategies at the ready is key.
How to collect overdue payments
According to Greg Waldorf, CEO of invoicing app Invoice2go, you want to deal with the problem head-on, but being straightforward doesn't have to mean being aggressive. If a client or customer hasn't paid a bill on time, here's how to ensure that you get paid while maintaining a good relationship with the customer.
1. Discuss all costs and payment terms before you begin a project.
Putting everything on the table right away not only sets payment expectations for your client, but it establishes the trust necessary for a strong, positive customer relationship, Waldorf said. Before diving into a project, make sure that your client is fully aware of the projected costs, and ensure that you take time to answer any questions upfront.
"Having this clarity from the beginning will help strengthen customers' trust and commitment to paying the full amount," Waldorf said. "If anything changes along the way, alert your customers in real time so there aren't any surprises."
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2. Bill for work upfront.
If you think it's too risky to use an invoice system, ask for full payment before starting any work. Mat O'Flynn, co-owner of Gilded Agency, said that the only way to mitigate nonpayments is to bill for the work upfront.
Some consumers may be wary of paying before receiving work – it's a two-way street. To provide some reassurance, encourage them to read testimonials or reach out to previous customers.
"If you have a spotless track record and take care of clients consistently over time, you will earn more and more right to take payment prior to work," said Ben Giordano, owner and founder of FreshySites. "When someone questions our policy, I tell them to call any of our clients, any day, anytime, and ask about our reputation and integrity as an organization."
You can also require a deposit before starting any work, turning down customers who don't seem like a good fit. This is often evident from the start; if there is an issue with down payments, there will likely be issues with future invoices.
"If a client refuses to pay a deposit, then I immediately know not to work with that client, even if they beg you to later on," said O'Flynn.
3. Send invoices right away.
With so many tasks on your plate as a small business owner, it can be easy to lose track of a customer invoice. You may even forget to send one in the first place, and going after a client for payment on a bill you never sent hurts your reputation. Waldorf advised sending your invoice as soon as a job is completed – and staying on top of it until it's closed out – to avoid falling behind.
4. Be persistent with late customers.
If a customer won't answer electronic correspondences about their bill, call them, and keep calling every day until they pay.
"Don't be aggressive; just don't stop asking," said Hunter Hoffmann, head of U.S. communications for small business insurer Hiscox. "Emphasize that you want to settle up the accounts so you can both focus on more important things. It will become much easier for them to pay you than to keep dodging your calls and making excuses."
5. Charge late fees.
No one wants to pay a late fee, and having them in place upfront can help deter customers from paying their invoices late. Set up a system that is backed by a policy or terms of service. For instance, if you don't pay within five days, you get a warning; 10 days, you get a late fee; 20 days, you lose service, suggested Giordano.
6. Set up a payment plan.
If a customer is having cash flow issues and they simply can't afford to pay your invoice in full upfront, setting up a payment plan can be helpful in ensuring you get paid. As part of the payment plan, negotiate an amount that the customer can afford, specifying over what period of time payments will be made.
What if customers won't pay?
A friendly reminder that a customer's bill is past due is the first step in collecting payment. Most of the time, a late payment was an honest mistake, and receiving that first follow-up is enough to make a client pay as soon as possible. Waldorf acknowledged that the subject of money isn't always easy to address, so you may want to ease into the topic.
"Use an opportunity to check in on a customer's satisfaction for your services, and then discuss any approaching or past-due invoices," Waldorf said.
In some cases, clients try to delay paying, saying they lost the bill, or that they need to reconcile their records to find the correct payment amount, Hoffmann said. If this is the case, Hoffmann advised sending an updated invoice right away – even if you know the customer has the original – to eliminate this excuse.
If your client still won't pay, be open to hearing their reasons. Giordano suggested asking questions about their satisfaction with your work, their financial complexities and anything that might contribute to their refusal to pay.
"Once you know why they refuse to pay, you can work toward a resolution with the client/customer," said Giordano. "Keep in mind that everyone is just a person, and rarely is someone actually out to hurt the other – most people are logical and willing to work toward a solution if you provide them with the opportunity to do so."
When a nonpaying client ignores your emails and calls about the invoice, demand payment from them more firmly. Service businesses working with the client on an ongoing basis are in the best position to give an ultimatum, Hoffmann said.
"Set a specific deadline when service will be cut off to light a fire under them," Hoffmann told Business News Daily. "It's amazing how quickly they can figure out how to pay when they realize how hard it will be to replace your service in a couple days."
Waldorf advised requesting a timeline for payment and continuing to follow up until the customer pays. If necessary, resend your original contract, indicating that you will escalate the situation if invoices remain past due.
To show the customer "you mean business," draft a demand payment letter. A demand letter is a formal written letter that outlines the debt that is owed to you and states what the result will be if the debt is not paid by the designated due date.
Bringing in outside help
If repeated attempts to contact the customer and collect your payment have failed, it's time to call in backup. Here are two options to help you get the money you're due.
Collection agencies: A debt collection agency specializes in recovering payments that are typically more than 90 days past due. The service takes the task of following up with the customer off of your hands, using tried-and-true tactics to get the individual to pay. This Business News Daily article contains more information on when and how to hire a collection agency, and it provides our recommendations of reputable collection agencies.
Factoring services: If you're strapped for cash and don't know when a customer will pay, a factoring service can help you get the money you need while you're waiting. With a factoring service, you sell your accounts receivable to a company for a certain percentage of the accounts' value (usually 70 to 90%). The service then advances you the money within a few days. Then the factoring service will collect your customers' payments and send the rest of the cash to you, minus the service fee. Factoring services are not collection agencies, though. They run a credit check on your customers before agreeing to purchase their invoices. If you use a factor for multiple customers' invoices, the service fees add up, and you may lose money in the long run. To learn more about using a factoring service, including which factoring services you might consider for your business, check out our sister publication, business.com's guide.
How to take legal action for nonpayment
When debt is significant enough, taking clients to small claims court or hiring an attorney may be viable options for getting paid.
Hire an attorney.
"We do a very honest cost analysis when considering a lawsuit," said Giordano. "Is the total cost (financial, emotional, time, energy, etc.) greater than the amount to be recovered? If it's more work to recover the $500 than it's worth, just learn the lesson, put in a system so it doesn't happen again, and move on."
However, if that client owes you a large sum of money and refuses to pay you or a collection agency based on the terms of your contract or invoice, a lawsuit may be necessary. If you decide to pursue legal action, consult with an attorney to determine how to proceed.
Take clients to small claims court.
Taking a client to small claims court is never a fun process and requires a lot of work, such as filing a complaint, preparing your case, presenting your case, and collecting a judgment. Thus, the amount of money you'd be suing for needs to be enough to be worth your time and meet your state's requirements (typically the minimum is $2,000).
According to Stephen Fishman, "Small claims court is particularly well suited to collecting small debts because it's inexpensive and fairly quick. In fact, debt collection cases are by far the most common type of cases heard in small claims court. And you don't need a lawyer to bring your case. Indeed, a few states – including California and Michigan – don't allow anyone to be represented by a lawyer in small claims court."
Marisa Sanfilippo contributed to the reporting and writing in this article. Source interviews were conducted for a previous version of this article.