What do you do when a debtor fails to pay their invoice on time? Here are some tips.
What are overdue invoices?
Overdue invoices are invoices which have not been paid in full by the time the agreed payment terms have elapsed. For example, if an invoice is issued with 30 day payment terms and the total amount hasn't been paid after the 30th day, the invoice is considered to be overdue, unpaid, or late.
Prevalence of late payment
Businesses live in dread of late payment and with good reason. 60% of invoices are paid late, according to the Export-Import Bank of the United States (EXIM).
Small-to-medium businesses (SMBs) are typically particularly vulnerable. They’re also the most likely to be damaged by unpaid bills, with cash flow and productivity suffering.
Some even go under due to unpaid invoices. And there’s evidence that late payments are on the increase, with some industries worse off than others.
Escalating action against late payers
Given late payment is so ubiquitous, what can companies do to encourage sluggish payers to hand over the money they're rightfully owed? There are a number of actions that can be taken, in order of most gentle to most severe:
Email chasing - Sending a friendly reminder to nudge the accounts payable department into action.
Phone calls - A call to the accounts payable team, when emails are replied to slowly or are missed.
Formal letters - To escalate a polite request for payment into something more serious. (These are often sent as both paper letters and emails.)
Sending debt collectors - Engaging a third-party to collect the debt on your behalf.
Charging late payment penalty fees or interest - Leveraging applicable laws to charge additional fees to late-paying customers.
Legal proceedings - Taking your customer to court to enforce payment.
It’s understandable that many businesses are reluctant to take some of these actions for fear of antagonizing a customer. But given the real threat of losing your business if invoices go unpaid, action is sensible - you just need to judge which will pay off best for you and your customer relationships.
After all, if you strong arm your customer into paying you, rather than taking the gentle approach, you may collect your payment, but it could be the last time you ever do business with them.
When you're dealing with a late payer, email is your best first approach. Include your company's name and the invoice number in the subject line of every email you send, and cover off the amount owed and the due date in the body.
Always attach a copy invoice to the email, so they don't need to go hunting for any further info (which will only serve to continue delaying payment).
Be polite but direct - the outcome you want is your late-paying customer to agree a date on which they will pay. If you want to prevent late payment in future, send these emails in the period between issuing your invoice and the date which payment is due. A timely reminder can make all the difference in your invoice being forgotten or deprioritized, versus being paid on time.
If your emails aren't getting a reasonable response - or any response at all - your next port of call is a phone call. You'll need to get in touch with the accounts payable team, however they can be deliberately difficult to reach.
A good backup option is getting in touch with your main point of contact in your customer's business. Have ready: the invoice reference number, a description of the goods or services provided, the invoice issue date and due date, who it was issued to, and details of any communications about this invoice so far.
The goal of a phone call should be to have them agree a date which they'll pay the invoice. If the appropriate party to authorize this isn't reachable, instead seek agreement that the message will be passed onto them, and that they will reach back out to you to provide a payment date.
If you're still not getting a promised payment date, or your late-paying customer repeatedly fails to meet their promised payment date, sending them a formal letter is your last option before undertaking much more severe action.
A formal letter will follow much the same format as a chasing email, however the language used is likely to be far less casual and will leave no room for doubt as to what you've done to remind your customer to pay, and how they've failed to follow through.
If you are prepared to send debt collectors, charge late payment interest, begin legal proceedings, or cease doing further business with this customer should they fail to pay you, make it clear in this letter.
Give them one final deadline to pay you by, and ensure you send this letter both via paper in the post, and via email.
Before engaging debt collectors, it's worth shopping around. Different providers are likely to have different fee structures, and some may operate more aggressively than others.
Always ensure you pick a licensed debt collection agency that matches the ethos and standards of your own business, otherwise your reputation could be harmed by association.
Late payment interest
Interest on late payments in the commercial sector is able to be charged, by law, in many countries around the world. It's worth looking into what your state allows.
Some legal frameworks also allow lump sum penalty charges to be made as well, to help recover the cost of collecting the payment. What's allowed to be charged, however, may be lower than you expect. Or, alternatively, the high penalties you try to write into your contracts may not be enforceable in court.
Either way, it's well worth weighing up the value of the invoice and the cost to your own time, against the amount gained with late payment interest and debt recovery penalties included. It may not be worth it.
This is undoubtedly the most severe action you can take against a late-paying customer. While sending debt collectors or charging late payment interest may shake your customer's interest in continuing to do business with you, taking them to court is almost certain to end your relationship.
Deciding to take this action shouldn't be thought of lightly - the cost of legal fees and the time it consumes from you could outweigh the potential return from winning the case.
Ways to avoid late payment
Of course, prevention is better than cure and taking measures to avoid being paid late is essential to good business:
Run credit checks on new customers of any size or, at the very least, ask around about their reputation. And always trust your gut. If you don’t have a good feeling about a customer, don’t deal with them.
Make sure your payment terms are clear and easy to read on the invoice. Include details of late payment interest charges, too.
Send out the payment demand as soon as the work is finished. A follow-up call or email to check the invoice has been received and is in order doesn’t go amiss either. In fact, maintaining a friendly relationship with whoever handles payments at the other end is always worthwhile to smooth out problems when and if they arise.
Consider whether it’s possible to ask for all or some of the money owed up front.
Set up payment reminders and alerts so that you’re immediately aware if a debt has gone over its due date.
Think about automating payments where possible to avoid the hassle of chasing invoices altogether. Payment providers such as GoCardless can do all the hard work for you, taking regular payments or one-off amounts quickly and at minimal cost.
Guide: What is Remittance Advice?
Deriving from the term ‘remit’ (meaning “to send back”), remittance refers to a sum of money that is sent back or transferred to another party. Check out our complete guide to Remittance Advice.