7 tips to collect unpaid invoices from customers

Are you tired of the silent treatment after sending multiple emails and leaving voicemails for overdue payments? Many businesses are burdened by thousands in unpaid invoices, often dismissing it as an unavoidable part of doing business. However, these aren't just isolated incidents, they're a cumulative drain on your cash flow and hinder your growth.

While most advice focuses on aggressive collection methods, a crucial element is often overlooked: prevention.

This article will demonstrate how to establish a system that proactively addresses 80% of payment issues. For the remaining 20%, you'll learn to efficiently manage them using modern tools that automate follow-up, freeing up your valuable time and resources.

7 tips to collect unpaid invoices from customers

Even with the best preventative measures, some invoices will inevitably go overdue. When that happens, you need a clear, effective strategy to recover what you're owed without damaging customer relationships. 

Here are 7 tips to help you collect unpaid invoices efficiently and professionally.

Before the due date (your preventive strategy)

A robust preventive strategy is your first line of defence against unpaid invoices. By setting clear expectations and streamlining your invoicing process from the outset, you can significantly reduce the likelihood of payment delays.

1. Set clear payment terms from day one

Clarity in your payment terms is paramount to preventing misunderstandings and disputes. 

• Clear payment terms: Include due dates (exact date or days after invoice), accepted payment methods (bank transfer, credit card, cheque), late payment penalties (interest or flat fees), and dispute resolution.
  
  
• Contract examples: "Payment is due within thirty (30) days from the invoice date (Net 30)." "Full payment is due upon receipt of the invoice." "Payment of £[Amount] is due upon completion of Project Phase 1. The remaining balance of £[Amount] is due upon final project delivery."
  
  
• Adjusting terms by client risk: For new/high-risk clients, require an upfront deposit (e.g., 50%) or immediate payment. Use milestone billing for larger projects. For established/low-risk clients, offer flexible net terms (Net 30/45) if they have a consistent payment history.

2. Check your customer's creditworthiness

Before extending credit, always assess a new customer's financial health.

A simple business credit check involves obtaining their consent, then using a reputable service like Experian, Equifax, or Dun & Bradstreet.

For a more streamlined approach, Chaser's automated credit checking and payer rating system can quickly provide insights, including a "Payer Rating" based on their past payment behavior.

When reviewing reports, look for red flags such as frequent late payments, numerous recent credit inquiries, high debt-to-equity ratios, and any signs of default or bankruptcy. If a client exhibits high risk, tactfully communicate the need for an upfront deposit (e.g., 50% of the project cost).

If you’re concerned about damaging your customer relationship, frame it as a standard practice for new partnerships or larger projects to ensure mutual commitment. Chaser also offers continuous credit monitoring to alert you to any changes in your customers' financial standing.

3. Send early reminders

Proactive invoice management, including polite reminders sent at least five business days before the due date, is crucial for cash flow and customer relations. Reminders should be professional, friendly, and clearly state the invoice number, amount due, and payment deadline.

Include a courteous notice about potential late payment fees. This approach improves collection rates and reduces administrative burdens.

When invoices are due (your follow-up/collection strategy)

When an invoice ticks over the overdue, you need a clear, effective strategy to recover what you're owed without damaging customer relationships.

4. Regular follow-ups

Send follow-up reminders for overdue invoices every 10-14 days. Adjust the frequency based on customer payment behavior. For instance, customers with a history of late payments may need more frequent reminders. Use various communication channels, such as email, phone calls, and registered mail, to ensure the message reaches the customer.

5. Friendly reminders

Always communicate with customers professionally and courteously. Avoid aggressive or confrontational language, which can alienate customers and make them less likely to pay. Instead, focus on finding a mutually agreeable solution, such as offering payment plans or discussing challenges that may be preventing payment.

6. Payment options

To facilitate customer payments, offer flexible options beyond traditional methods like checks and bank transfers. Consider accepting electronic payments, credit cards, and online payment platforms. Additionally, if feasible, provide payment plans that allow customers to split their payments into smaller amounts.

7. Legal action/debt collection (if necessary)

Legal action should only be considered as a last resort, after all other recovery methods have been exhausted. Consult with a lawyer to explore available 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; therefore, carefully weigh the costs and benefits before pursuing this option. Professional debt collectors offer another viable option. While there is a cost implication, utilizing a debt collection service is generally preferable to simply writing off an invoice as bad debt.

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 business's working capital being tied up in accounts receivable. This can make it challenging for the business 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.

Accrual of 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 hurt 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.

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 behavior. If they have a good track record of payment, you can afford to be a little less persistent to preserve your good relationship.

Best practices for collecting past due invoices

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.

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 promptly, increasing the likelihood of prompt payment. 

Regularly following up on overdue invoices 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.

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 a payment, always remember to send a ‘thank you for your payment’ email.

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.

When to stop chasing unpaid invoices

There comes a point in every debt collection process where you need to consider whether the effort and resources expended are still worthwhile.

Continuing to chase an invoice when the costs outweigh the potential recovery can be counterproductive, impacting not only your finances but also your valuable time and customer relationships.

A common-sense formula to consider is straightforward: if the cost to chase an invoice is higher than the outstanding amount of the invoice itself, it's time to evaluate whether to stop.

This "cost to chase" isn't just about direct expenses; it includes a range of factors that can silently erode your profitability and well-being.

Factor in relationship damage and stress costs

Beyond the financial outlay, consider the intangible costs:

• Relationship damage: Aggressive or prolonged chasing can sour a customer relationship, potentially losing you future business that far outweighs the single overdue invoice. Evaluate the long-term value of the customer and whether continued pursuit jeopardizes that.
  
  
• Time and resource drain: Every hour spent on follow-up, phone calls, or administrative tasks related to an overdue invoice is an hour not spent on revenue-generating activities or serving other paying customers. The cumulative effect of this lost productivity can be substantial.
  
  
• Stress and morale: Constantly battling over overdue payments can be a significant source of stress for you and your team. This can impact overall morale and efficiency.

By carefully weighing these factors against the amount owed, you can make an informed decision about when to draw a line and either write off the debt or consider alternative, less resource-intensive strategies.

How TaxAssist got £20k GBP of clients’ debts paid in 30 minutes with Chaser

TaxAssist Accountants faced significant challenges managing outstanding invoices, needing an efficient solution to recover client debt while preserving relationships. They implemented Chaser's automated credit control software, which successfully automated follow-ups, maintained professionalism, tracked communication, and provided valuable visibility. 

This strategic move enabled them to recover £20,000 GBP in client debts in just 30 minutes, highlighting the powerful impact of modern tools on their debt collection process.

This case study demonstrates how technology can transform financial operations, proving its effectiveness in enhancing efficiency and improving debt recovery outcomes.

How Chaser can help you collect unpaid invoices

Chaser streamlines accounts receivable with powerful chasing capabilities. Automate professional email and SMS payment reminders, utilize auto-call features for direct communication, and offer flexible options through a dedicated payment portal and customizable payment plans.

With Chaser Pay, you can simplify the payment process for your customers, ensuring timely collections and improved cash flow, all while preserving valuable customer relationships.

Addressing your unpaid invoices

Collecting unpaid invoices doesn't have to be a reactive, stressful battle. By embracing a proactive approach, and combining robust prevention strategies with efficient collection methods, businesses can transform their cash flow management.

This article has outlined how setting clear payment terms, assessing creditworthiness, and implementing timely, professional follow-ups can significantly reduce overdue payments. 

The goal is to build a system that not only recovers outstanding amounts but also preserves valuable customer relationships. Imagine a future where your payment collection is predictable, automated, and no longer a drain on your resources.

Ready to make that future a reality? Chaser offers the intelligent automation you need to collect unpaid invoices effectively and effortlessly. Speak to an expert and discover how Chaser can streamline your accounts receivable, improve your cash flow, and free up your time.

FAQ