At a time when 60 percent of all invoices issued are paid late, proactively chasing overdue payments has become a critical factor in ensuring your business’s cash flow.
Instead of simply hoping that your customer pays, or writing off an outstanding invoice as bad debt, the credit control experts at Chaser have put together five effective strategies to help you get paid.
What does an outstanding invoice mean?
Before we get into how to collect outstanding payments from customers, let’s first take a look at an outstanding invoice definition.
Outstanding invoice meaning
An outstanding invoice is an overdue bill that has been issued to a customer but has not yet been paid. It represents an amount of money that is owed to a business for goods or services that have been delivered. An invoice with balance due can be a major cash flow problem for businesses, especially if they are not managed effectively.
Why is collecting unpaid invoices important?
It is crucial for a business to prioritize chasing payment on unpaid invoices for several compelling reasons:
Cash flow disruption
Unpaid invoices can have a detrimental impact on a business's cash flow. When customers delay payments, it can lead to a significant amount of a business's working capital being tied up in accounts receivable. This can make it challenging for the business owner to cover operational expenses, such as payroll, rent, and inventory purchases.
Without a steady flow of cash, a business may struggle to maintain its day-to-day operations and may even face difficulties in meeting its financial obligations.
Bad debt
Another significant risk associated with unpaid invoices is the potential for bad debt. If an invoice remains at an outstanding balance for an extended period of time, it may become increasingly difficult to collect the owed amount.
This can result in the business having to write off the invoice as bad debt, which can have a negative impact on its financial statements and profitability. Bad debt can also affect a company's credit rating, making it more difficult to secure loans and other forms of financing in the future.
Strained customer relationships
Collecting past due invoices without due care can also damage business relationships. When customers fail to pay their invoices on time, it can create tension and conflict between the business and its customers. This can lead to a breakdown in communication and trust, potentially jeopardizing future business opportunities.
If not handled in a professional and timely manner, the process of chasing payment can further escalate tensions and make it more difficult to resolve the issue amicably.
Legal complications
In some cases, a business may need to resort to legal action to collect outstanding bills. This can be a time-consuming, expensive, and emotionally draining process.
Litigation can involve hiring lawyers, preparing legal documents, attending court hearings, and potentially dealing with appeals. The legal fees associated with debt collection can quickly add up, further exacerbating the financial burden on the business.
How soon should you start chasing your outstanding bills?
The best time to start chasing an outstanding invoice is actually before it becomes outstanding. A gentle and polite reminder of an upcoming invoice can help to nudge your customer into a timely payment and prevent the invoice from becoming due in the first place.
Chaser's article on how to ask for payment professionally in a message gives you an excellent foundation for writing your own payment reminder message.
If the invoice does become overdue, a good rule of thumb is to remind the customer of the day on which payment is due, and every 10 days after that.
However, it’s always a good idea to set your reminder schedule based on your customer’s payment behaviour. If they had a good track record of payment, you can afford to be a little less persistent to preserve your good relationship.
How to collect unpaid invoices from customers: 5 best methods + tips
- Early reminders:
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- Send gentle reminders to customers at least 5 days before invoices become due.
- Use a professional and friendly tone, reminding customers of their upcoming payment due dates.
- Include the invoice number, amount due, and payment deadline in the reminder.
- Also include a reminder that unpaid invoices may accrue late payment fees.
- Regular follow-ups:
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- For overdue invoices, send follow-up reminders every 10-14 days.
- Tailor the reminder frequency based on customers' payment behavior. For example, customers with a history of late payments may require more frequent reminders.
- Use different channels for follow-ups, such as email, phone calls, and registered mail, to ensure that the message reaches the customer.
- Friendly reminders:
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- Maintain a professional and courteous tone in all communications with customers.
- Avoid aggressive or confrontational language, which may alienate customers and make them less likely to pay.
- Focus on finding a mutually agreeable solution, such as offering payment plans or discussing potential challenges that may be preventing the customer from paying.
- Payment options:
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- Offer flexible payment options to make it easier for customers to pay their invoices.
- In addition to traditional payment methods like checks and bank transfers, consider accepting electronic payments, credit cards, and online payment platforms.
- If possible, offer a payment plan option or allow customers to split their payments into smaller amounts.
- Legal action/debt collection (if necessary):
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- Consider legal action only as a last resort after all other methods have failed.
- Consult with a lawyer to explore legal options, such as sending a demand letter, filing a lawsuit, or placing a lien on the customer's property.
- Be aware that legal action can be time-consuming and expensive, so it's important to weigh the costs and benefits carefully before pursuing this option.
- Professional debt collectors are another option. As with legal action, there is a cost implication. However, using a debt collection service is generally better than simply writing an invoice off as bad debt.
How to collect past due invoices: 4 best practices
Best practice 1 - Clearly define your payment terms
Clearly defining payment terms upfront is of utmost importance in the invoicing process. It sets the expectations for both parties involved regarding the timing, method, and conditions of payment. Clear payment terms help avoid misunderstandings, disputes, and delays in receiving payment.
By establishing the terms upfront, both the buyer and the seller can plan and manage their cash flow accordingly, ensuring a smooth and efficient payment process.
Additionally, well-defined payment terms contribute to building trust and professionalism between business partners, fostering a positive and collaborative relationship.
Best practice 2 - Always be proactive
Being proactive when chasing outstanding invoices is crucial for maintaining a healthy cash flow and preventing bad debt. It ensures that customers are reminded of their obligations in a timely manner, increasing the likelihood of prompt payment.
Regularly following up on overdue invoice can help businesses maintain positive customer relationships and avoid the need for more drastic measures such as legal action or debt collection.
Proactive invoice chasing allows businesses to identify and address any underlying issues that may be causing payment delays, such as billing errors or customer financial difficulties.
Best practice 3 - Customize payment terms based on risk assessment
Customizing payment terms based on risk assessment is crucial for businesses to mitigate financial risks and ensure timely payments.
By evaluating factors such as a customer's credit history, payment history, and industry, businesses can tailor payment terms that align with the level of risk associated with each transaction.
This approach enables businesses to strike a balance between accommodating customers' needs and protecting their cash flow. It minimizes the likelihood of late payments, reduces the risk of bad debt, and fosters positive relationships built on trust and mutual respect.
When the customer does make payment, always remember to send a ‘thank you for your payment’ email.
Best practice 4 - Incorporate clear payment terms into contracts
Incorporating payment terms into contracts is of paramount importance for businesses to safeguard their financial interests and ensure timely payments for goods or services rendered.
Clearly defined payment terms outline the expectations regarding the timing, method, and conditions of payment, leaving no room for misunderstandings or disputes. They establish a legal framework that protects both parties involved in the transaction.
FAQs
To help you fully understand how to collect on an outstanding invoice, the credit control experts at chaser have collated and answered the most common questions on the subject:
Does outstanding mean overdue?
Yes, "outstanding" in the context of invoices or bills usually means overdue. It refers to an invoice or bill that has not been paid by the due date. Outstanding invoices can be a significant challenge for businesses, as they can tie up working capital and make it difficult to cover operational expenses.
What is a remaining balance invoice?
A remaining balance invoice is an invoice issued after a partial payment on an account, showing the outstanding amount due. It includes the original invoice amount, the partial payment amount, and the remaining balance. Additional information such as the invoice number, due date, and potential late payment fees may be included.
What’s the difference between outstanding invoices and past due invoices?
These are basically similar terms for the same thing. An invoice that has been issued to a customer but has not been paid by its stated payment date.
What are the most common causes of unpaid invoices?
The most common causes of unpaid invoices are:
- Late payment: Customers may simply forget to pay their invoices on time.
- Cash flow problems: Customers may not have the cash on hand to pay their invoices when they are due.
- Disputes: Customers may dispute the amount of the invoice or the quality of the goods or services provided.
- Billing errors: Customers may receive invoices that are incorrect or incomplete.
- Lack of communication: Customers may not be aware of the payment terms or may not have received the invoice.
- Bankruptcy: Customers may file for bankruptcy, which can prevent them from paying their invoices.
Which collection technique is used as a last resort in the collection of unpaid balances?
Both legal action and a debt collection agency can be used to collect on unpaid invoices. However, because both have a time and cost implication, it is best to exhaust all other options first.
Do unpaid invoices expire?
No.
What is the legal action in case of a long unpaid invoice?
You can choose to take legal action to recover an unpaid invoice. However, there is a cost implication to choosing to take legal action, making it an action of last resort.
Can you sell your unpaid invoices?
Invoice factoring is a financial transaction where a business sells its accounts receivable to a third-party company (the factor) at a discount. The factor then takes on the responsibility of collecting payment from the customers and assumes the risk of non-payment.
How to avoid late invoice payments?
To avoid late invoice payments, businesses should send invoices promptly with all necessary information, set clear payment terms, offer multiple payment options, follow up on overdue invoices, offer discounts for early payment, consider using credit control automation, and build strong customer relationships. By implementing these strategies, businesses can improve their cash flow, reduce costs, and maintain positive customer relationships.
What is the standard late fee on an invoice in 2025?
The amount you can charge as a late fee on an overdue invoice depends on where you are doing business. For example, in the UK, it is set at 8% interest, plus the Bank of England base rate. See how to apply late fees internationally here.
Reduce outstanding invoices automatically
With Chaser, you can utilize automated, customizable payment reminder schedules for each of your different customer groups and chase invoices at the intervals you choose with accounts receivables automation software. Proactive, and preventative strategies can be taken to minimize outstanding invoices from the start, such as by utilizing credit checks or accessing AI-generated payer ratings and late invoice payment predictions in the software.
Try accounts receivables automation for free, for 10 days to save time and put an end to outstanding invoices.
