How to Deal With Unpaid Invoices
Unpaid invoices are a pain. Not only do they mess up your cash flow, but dealing with them quickly becomes a frustrating, time-consuming process that puts you in an awkward position.
Unfortunately, unpaid invoices don’t magically get paid. Without a predictable stream of income, your business can quickly suffer, so you will have to take action to make sure you’re consistently paid on time.
The good news is that there are strategies that can prevent and recover late payments. One strategy is to send a traditional snail mail invoice with Mailform, which may command more attention and higher responsiveness
Reasons for Unpaid Invoices
Before you try to get your hard-earned money, it might help to understand why you have unpaid invoices. Sometimes there’s a good reason why a customer or client hasn’t paid an invoice, and it’s important not to jump to any conclusions.
1. Never Receiving the Invoice
Sometimes a customer never pays because they never received an invoice. It’s easy to mistype an email address or misspell a mailing address. Or, perhaps you emailed the invoice, but for whatever reason, it ended up in their spam folder. Before you confront a customer about a late payment, make sure they actually got the invoice in the first place.
2. Red Tape
Some customers are faster at paying invoices than others due to their processes. For example, enterprises may require approval from higher-ups before paying an invoice. In some cases, a business needs certain forms and documents signed before paying invoices, such as a W-9 form.
3. You Make it Difficult to Pay
One reason customers don’t pay invoices right away is that it’s difficult to do so. They may have the money, but not the time or patience to figure out annoying problems. For example, some customers delay paying when there aren’t enough payment options and are forced to change their normal payment methods. Other reasons it can be difficult to pay:
You sent invoices late
You requested the wrong amount
You didn’t include enough information, like what the invoice is for
4. Simply Forgot
Customers, especially if they’re businesses, are busy like everyone else. Sometimes people intended to pay their invoices but genuinely forgot to because they got interrupted before they made a note of it. Or maybe the person who pays invoices quit and the company is in the middle of replacing the person and some of the invoices went unnoticed during the transition.
5. Short on Money
Sometimes your customers are short on cash, which can happen for several reasons, such as unexpected expenses or changing markets. It can go a long way with your clients if you understand their situation. One option is doing a payment plan. Even if this is outside of your normal procedure, at least you’ll eventually get paid.
6. Ill Intent
Unfortunately, not everyone practices ethical business. Sometimes customers don’t pay for a legitimate reason, but a poor attitude or ignoring several reminders is a red flag that your customer has no intention of paying.
Ways to Prevent Late Invoices
The best way to deal with unpaid invoices is to try to prevent them from ever happening. You can develop proactive strategies that minimize the number of unpaid invoices that you have to deal with. Here’s how:
1. Research Clients Before Doing Business
If you’re thinking about working with a prospect, it never hurts to do a little research before signing a contract. Clients that have a bad habit of not paying invoices usually have a track record somewhere.
If they’re a business, a great place to start is the Better Business Bureau website. There’s a good chance the company will be listed, rated, and even have a few reviews from past customers. In some cases, you can use resources like Yelp or ask about a client in a forum related to your industry. Never be afraid to ask for testimonials, reviews, or case studies that can prove your client is a worthwhile business partner.
If you see any red flags, you should consider the possibility your prospect will be a chronic late payer.
2. Reward Early Payments
A common practice for invoicing is to include a discount for early payers. In your contract, you can include a clause that provides a flat fee or percentage discount to any invoices paid before their due dates.
This incentivizes customers to pay immediately so they can save some money. The downside to this strategy is that you may lose out on a little money if a lot of clients take advantage of the discount.
You will have to balance the discount size so it encourages early payments, but doesn’t rob you. Another option is to factor in the discount to your invoice and simply charge more.
3. Penalize Late Payments
Another clause you can add to your contract is late payment penalties. This allows you to tack on an extra percentage to your total invoice whenever clients fail to pay on time.
For example, let’s say you invoice at net 30, which means customers have 30 days to pay an invoice after receiving it. In your contract, you can state that a 5% additional payment will be added after the 30th day.
Strategies for Recovering Unpaid Invoices
Preventing unpaid invoices is a great practice, but even with these measures in place, you may still have late payments to recover. Here’s what to do:
1. Double-Check Information
Before asking a customer anything, make absolutely sure the problem isn’t on your end. Doing so can avoid confusing and embarrassing situations.
First, double-check all the information. Did you send the invoice to the right place, for the right amount, and at the right time? Then check with your bank or payment service to see if you may have received the payment after all.
Sometimes you lose track of things, or you found a typo and sent the invoice to the wrong place.
2. Follow Up Promptly
Don’t be afraid to follow up after sending an invoice or after a due date passes. You don’t have to panic or escalate matters immediately. Sometimes people are busy and just haven’t gotten around to paying your invoice.
There are a lot of opinions about how often you should follow up, so you’ll have to find a balance that works for you and your customers. You can send an email the day an invoice is due, give them a call a few days after, or send a physical letter.
However you decide to do it, it’s good practice to remind customers shortly after an invoice is due. Don’t wait several months, because by that time you and your customer may have forgotten the details of the transaction. And the longer you wait, the harder it is to ask for payment.
3. Be Personable
Paying late can be a frustrating and embarrassing situation for customers. Being personable goes a long way because they realize you’re not trying to make them feel bad. People are more likely to help people who are kind to them, so it never hurts to be personable over a phone call or in a letter.
Factoring is the practice of selling your invoice to a third party at a discount. It’s unfortunate to lose some of your payment, but at least you get paid. The factor takes over the responsibility of retrieving the overdue payment, and you can move on to new clients.
5. Report to a Business Bureau
If a business isn’t making payments, you can report them to the appropriate bureaus. There’s also a possibility that just threatening to report a business may be enough for them to pay.
6. Lawyer Up
This is the nuclear option. Involving lawyers is both serious and expensive, so save this decision for worst-case scenarios. In some cases, the mere threat of a lawsuit is enough to get clients to pay.
Before taking legal actions, have your lawyer send a formal letter to your client. It might be enough to scare them into paying.
In addition to these strategies, you may also want to consider stopping work with a client if they’re overdue on payments. This communicates that you’re serious about getting paid and also prevents setting up a bad precedent of late payments.
Technologies to Use to Notify Customers
There’s a handful of ways you can reach out to your customers for late payments. You’ll have to try a few options and decide which method is best for you and your clients.
1. Email -The simplest way to notify your customers is by emailing them. Checking emails is a near-universal practice in any industry and there’s a good chance your client will see it.
2. Snail Mail- You can send a physical letter to customers too. It’s a little slower, but one advantage to snail mail is how powerful it is. Everyone gets emails about late bills, but receiving a hard letter sometimes leaves a more powerful impression. Use Mailform to upload and send 1 or 100 invoices now
3. Short Message Service (SMS) - An SMS sends a text message to your customer’s phone. You may not have your client’s number, but if you do this can be a solid option. Customers may have a backlog of emails and calls, but they likely still check all their text messages.
4. Phone Calls - Phone calls are the most personable of these options. A call allows you to convey tone and emotion that may be hard to capture in a text format. It also allows more back-and-forth if your client has any questions or concerns.
How Accounting Tools Handle Unpaid Invoices
Accounting software can make your life a lot easier. Here’s how the most popular tools handle unpaid invoices. Mailform offers integration with most of these tools
QuickBooks allows you to customize invoices and has a feature that enables you to send a gentle reminder for unpaid invoices. You send the reminder manually, but you can also automate it. Meaning, you can set up your invoices to automatically send a reminder after a certain date.
Harvest also has a feature that allows you to create invoices and automate reminders for late payments. For customers to pay, you will have to set up an online portal and use another service like PayPal.
With Xero you can send invoices and set up automatic reminders. However, key features are missing, such as being able to send to multiple addresses at one time. Xero is in the process of creating new features.
FreshBooks provides a lot of options when creating invoices, including the ability to brand your invoices and use templates. You can also use FreshBooks to automate reminders and automatically charge interest to overdue invoices.
How to Streamline Recovering Unpaid Invoices
As you start recovering unpaid invoices, you will want to get faster and better at it. Here are a few ways to streamline the recovery process:
1. Develop a System
The first few times you recover an unpaid invoice, you may not know the best methods or timing. Should you send two reminders by email and then call the client? How many days should you wait before the next step?
As you figure out the best way to contact your customers, you can develop a system that you use every time you need to collect a late payment. For example, maybe your system is: send one email the day it’s overdue, make one call after three days, then send a letter after three more days.
This reduces stress because you’ll always know what the next step is and you can go into conversations about unpaid invoices with a battle plan every time.
2. Create Templates
Invoices are practically identical. So are reminders about late payments, regardless of whether it’s an email, letter, or even a phone call.
Write one reminder email template and keep it on hand. Either automate it or have it bookmarked so you can copy and paste it into your email. This will save you tons of time and you won’t have to worry about saying the right words or accidentally including typos every time you need to collect money.
Do this with every document in your process. Even a phone call can be scripted, especially if it goes to voicemail.
3. Use Mailform
Mailform is a nifty service that enables businesses to mail invoices and remind customers of unpaid invoices. It integrates with accounting software such as QuickBooks, Harvest, Xero, and FreshBooks.
Sometimes email isn’t the best way to ask a client to pay an overdue invoice. With Mailform, you can send a digital document via mail in minutes.
Unpaid invoices may be frustrating, but you can keep them to a minimum and handle them professionally. Be proactive about preventing late payments by vetting clients, incentivizing early payments, and penalizing late payments.
Then, develop systems and strategies to go after unpaid invoices. With the right tools and processes, your business can weather the challenge of late payments.