Last editedFeb 20232 min read
What can you do if a customer doesn’t pay the full invoice amount? A short-paid invoice can take a toll on your cash flow and resources, so it’s important to try and resolve any disputes to receive full payment. In this guide, we’ll discuss the business impact of short payments as well as how to deal with them.
What is a short payment?
When a customer doesn’t pay the full amount due on an invoice, the invoice is short paid. The partial payment received by the business is called a short payment. There are many reasons why a customer might not pay the full amount charged, chief among them being some type of dispute. No matter the issue, your accounts receivable team will need to address it to recover the outstanding balance. Otherwise, your business is giving the customer what amounts to a no-interest loan with no guarantee the remaining balance will be paid.
Why do customers short pay their invoices?
There are numerous causes of short pay invoices, some more valid than others.
1. Valid short payments
Partial payments are considered valid if the business hasn’t upheld their end of the bargain. Perhaps the shipment included missing or incorrect items, or the customer was charged twice for the same item. If a customer has a valid dispute with the bill that needs resolution, they will only pay for the part that is correct. Sometimes short payments are simply due to human error, which is another valid issue that needs correcting.
2. Invalid short payments
By contrast, invalid short payments pop up when the customer deliberately wants to avoid making a full payment. They may not have sufficient funds in their account or are looking for an unwarranted discount. These issues are harder for businesses to solve because the customer knows they owe the money but doesn’t want to pay. In this case you’ll need to use collections procedures to recover the funds.
The impact of a short-paid invoice on business
No matter the cause, it’s undeniable that short-paid invoices can impact your business revenue. When you don’t receive full payment for goods and services rendered, it reduces sales with a resulting negative cash flow.
This type of situation also impacts your business accounting. For example, short payments make reconciliation difficult because the invoices don’t match their purchase orders. While your team tracks down outstanding balances and resolves disputes, accounts remain in limbo. This takes time and resources away from other accounts receivable tasks.
How to handle a short invoice
What can you do when a customer only makes a partial payment? Is the reason for the short invoice valid or invalid? The first step is to find out what went wrong. Use a process of dispute management to get in touch with your customer and find out their reasoning. In many cases, the issue is easy to resolve. For example, if the customer didn’t receive an item that was ordered, you can simply send it to them to recover the full payment.
Short-paid invoice letters are a tool used in business to request outstanding payment. You should include details such as the following in your letter:
The original invoice
Additional documentation related to the transaction
Information regarding payment terms and late fees
Contact details to resolve the issue
Payment link for quick settlement
Of course, it’s best to prevent the short-paid invoice from happening in the first place. Automating your invoicing process is a great start. With automated software, you can put consistent procedures in place to review invoices and cut down on delay-causing errors. Smart solutions use tools like data analysis for better control over payment collection.
GoCardless is a prime example of a smart payments tool, perfect for both one-off and recurring invoices. For recurring invoices, simply set up a payment plan at the beginning of the project, powered by Direct Debit. If it’s a one-off job, you might find Instant Bank Pay the best fit - send your client a secure paylink in an email, text, or e-invoice. They can follow the flow in a matter of moments, resulting in instant confirmation of payment success for you both.
We can help
GoCardless is a global payments solution, setting people and businesses free from the frustrations and cost of outdated payment methods. Find out how GoCardless can help you with one-off or recurring payments.