While none likes dealing with late payments, it is something that every business has to face at some point. Unfortunately, dealing with these issues can be stressful (not to mention financially challenging). Failure to pay causes you to worry about how you are going to get your money back and the impact it will have on your accounts receivable.
Fortunately, there are strategies service businesses can use to collect an unpaid invoice from a late-paying customer.
This blog post provides some resources on what to do when a customer does not pay. It breaks the situation down into three easy-to-understand, easy-to-action segments to ensure you get paid on time.
Opening communication and gathering information
Once the invoice passes its payment deadline, the first thing to do is reach out to your customer. You can do this via email payment reminders, speaking to customers about payments over the phone, sending payment reminders via SMS text messages, or social media. Critically, open up a line of communication as soon as possible. Getting the conversation started increases the chances you will receive payment.
When reaching out, be polite and professional. At the same time, remind the client that they have broken your payment terms, but do so cautiously and reservedly. Keep in mind there could be a legitimate reason why they have not paid yet.
Next, gather as much information as you can from the customer. Determine if they received the invoice, when they expect to be able to pay, and if any issues are preventing them from paying on time.
Documenting everything at this stage should be standard procedure. You can use this documentation later on if you need to take further action.
It's worth remembering that, especially with smaller businesses, the customer may be unable to pay their bill because of cash flow issues outside of their control. In this case, being understanding and working with them to come up with the best solution is best for both parties.
No one likes being behind on their bills, and being understanding will usually result in the customer doing their best to rectify the situation as soon as possible.
No one likes being behind on their bills, and being understanding will usually result in the customer doing their best to rectify the situation as soon as possible.
Actions to take:
- Reach out to the customer to open a line of communication
- Gather information to understand their current situation
- Offer a solution that works for both parties
- Document every interaction
- Consider extending payment terms when there are unforeseen circumstances
What not to do:
- Don't be confrontational (including demanding a late fee)
- Don't make assumptions (including about what the client owes)
- Don't threaten legal action immediately (for instance, by sending a debt collection letter)
Coming to a compromise
Once you have a fuller understanding of the customer's financial situation, you can begin to work out a compromise. This may involve offering them a payment plan or extending the due date on the invoicing system.
Every customer is different. Therefore, there is no one-size-fits-all solution when it comes to payment options. Some of the options you can offer include:
- Allowing the customer to make smaller, more frequent payments. This approach can make it easier for them to keep up with their payments and avoid falling behind again. When creating a payment plan, make sure to outline all the terms and conditions as well as what will happen if they default on the payment schedule.
- Giving the customer a grace period. This option is usually a set period (e.g. 30 days) during which they can make their payment without incurring any penalties or late payment fees. This allows them some leeway in case they have a temporary setback or something comes up that prevents them from making their payment on time.
- Accepting alternative forms of payment. If the customer is unable to pay by check or credit card, you may be able to work out a different arrangement, such as allowing them to pay with cash or through an online service such as PayPal. Electronic payments can make it more straightforward for clients to pay overdue payments. It can also improve customer satisfaction and help a non-paying customer avoid court proceedings or final demand letter warnings.
Whatever solution you decide on, be sure to document it in writing and get the customer's agreement. This will help to avoid any misunderstandings down the road.
Actions to take:
- Work with the customer to come up with a solution that is mutually beneficial and agreeable, such as offering a payment plan
- Document the agreement in writing, including when you will get paid
- Ensure that both parties understand and agree to the terms of the arrangement, including late fees
What not to do:
- Do not agree to any terms that you are not comfortable with
- Do not make any promises that you cannot keep
- Do not put yourself in a position where you could get taken advantage of financially. Be sure to protect yourself and your business by only agreeing to terms that are fair and reasonable.
Escalating the situation
Most non-payment issues can be dealt with using the steps above. However, there are times when you may need to escalate the situation. Sometimes, the customer will simply not respond to your attempts to contact them or work out a payment plan.
If the customer is still not responding to your attempts to contact them or work out a payment plan, you may need to send them a formal notice of default to get paid. This document spells out the terms of the original agreement and states that the customer is in breach of the contract.
It also outlines the actions you will take if the customer does not pay, up to and including legal action. Sending a formal notice of default is often enough to get the customer to start working with you to find a solution.
When sending a formal notice of default or invoking the small claims court, it is important to include all of the relevant information about the original agreement and the customer's failure to pay. This will give the customer a clear understanding of the situation and what they need to do to remedy it.
Many small business owners want to avoid legal proceedings. Legal fees can be costly, whether the customer pays or not. Therefore, the decision to seek legal action should only be considered after exhausting all other options. Receiving payment via a civil lawsuit is costly for any small business and may undermine your profitability.
Levying late payment interest
Another option is to start charging the customer interest on their outstanding balance. This is known as "levying late payment interest."
The amount of interest you can charge is governed by UK law. The rate is set at eight per cent above the Bank of England's base rate.
You can start charging interest from the date the payment was due according to payment terms, not the date you sent the notice of default. However, you must give the customer at least seven days' notice before you start charging interest or late fees. This notice can be included with your formal notice of default.
You can also charge for the resources you've used to try to get the payment, such as making phone calls or sending a debt collection letter. This is known as "reasonable recovery costs." The amount you can charge is governed by UK law and is limited to £40 plus VAT for each debt. Small businesses can only start charging reasonable recovery costs after you've sent a notice of default and the customer has failed to respond within 30 days.
Using Factoring Services
Using a factoring service is another option that can make getting payment easier if a client misses an instalment. These services deal with financial complexities, taking a fraction of the upfront payment to cover their costs. This approach can lead to early payments but it could also result in lower margins and a missed opportunity to earn more money. The factoring service also has an incentive to harass customers instead of working with them to receive payments.
The problems and potential of debt collection
If the customer doesn't pay causing you to lose money, you can also escalate the debt to a collections agency. However, there are potential positives and negatives to consider, as with factoring services.
On the one hand, using an outside agency can free up your time to focus on other aspects of your business. And, if the agency is successful in collecting payment, you'll receive the money owed to you plus any interest or fees that were specified in your original contract with the debtor.
However, there's also the chance that working with the wrong collection agency could damage your relationship with the debtor. In some cases, it might even make it harder for you to collect payment.
Before deciding to hand over your unpaid digital or paper invoices to a collection agency, be sure to weigh the pros and cons. Doing so will help you determine whether or not working with a collection agency is the right choice for your business.
The good news is that there is a more modern alternative to traditional collection agencies.
Chaser's professional debt collection services are designed to help businesses recoup their unpaid invoices quickly and efficiently, without damaging relationships with customers.
Instead of threatening or harassing your customers, Chaser's debt collectors will work with them to come up with a payment plan that works for both parties, even if you have a legally binding contract in place.
If you're interested in learning more about how Chaser's software can help you collect your unpaid invoices, get in touch to learn more.
Actions to take:
- If you're struggling to collect payments from customers, it may be time to consider using professional debt collection services from a reputable supplier
- When looking for a debt collection agency, it's important to choose one that will work with you and your customers to find a solution that works for everyone. If they have an accounts payable issue, threatening them won't work.
What not to do:
- Don't hire a debt collection agency that will demand payment, harass your customers and damage your customer relationships
- Don't choose an agency that doesn't have experience working with businesses like yours
- Don't pick an agency that doesn't have a good reputation
Collecting this way can help you avoid legal and court fees as a small business owner.
Taking preventative steps in the future
Taking preventative steps to avoid future invoices going unpaid is always a good idea. While it's impossible to eliminate the risk of non-payment, there are a few things you can do to minimise it.
Credit checking
One of the best things you can do is to be more selective about who you extend credit to by conducting credit checks. If a customer has a history of non-payment, it's probably not worth extending them credit. The best way to find this out is to do regular credit checks on your customers.
Chaser's credit checking feature is quick, and easy, and can help you avoid extending credit to risky customers. With ongoing reports and automatic updates when customer risk levels change - you can reduce credit risk with up-to-date insights. If in doubt, ask for payment upfront.
Offering discounts for early payment
Another way to incentivize timely payments is by offering early payment discounts. This gives customers an incentive to pay their invoices as quickly as possible. You can also include a prominent late fee disclaimer saying what happens when the client doesn't pay.
There are several ways to structure early payment discounts. For example, you could offer a discount of two per cent if the invoice is paid within ten days. Or, you could offer a discount of five per cent if the invoice is paid within thirty days.
You'll have to decide what makes sense for your business and your customers. However, offering early payment discounts is a great way to encourage timely payments.
Sending reminders
If you've extended credit to a customer and they're late on their payments, one thing you can do as a business owner is send them an invoice payment reminder.
This gentle reminder can be sent via email, regular mail, or even text messages. They should be polite but firm, and include information about the outstanding balance and when it's due.
Chaser's automated credit control software can help you send reminders and track payments. If the client refuses to pay, you can write a formal letter).
Have a credit policy in place
You should also have a clear and concise credit control policy that you communicate to all of your customers. This policy should outline when payments are due, what the non-payment penalties are, and what actions you'll take if an invoice remains unpaid.
Enforcing your credit policy can be difficult, but it's important to do so if you want to avoid unpaid invoices. One way to enforce your policy is to set up automatic reminders for when payments are due. You can also withhold services or products until the invoice is paid.
You should also have clear and concise payment terms that you communicate to your customers upfront, including the risk that you might take them to small claims court. This will help ensure that there's no confusion about when an invoice is due and what the consequences are for outstanding debt.
Let Chaser help you with customers who won't pay
Chaser can automate your accounts receivable process and send personalised payment reminders to your customers automatically, saving you time and hassle.
You can also keep track of all your outstanding invoices in one place, so you always know who owes your business money and how much. This makes it easy to follow up with late-paying customers and take action if necessary.
Inbuilt tools in Chaser's accounts receivables automation software such as the payment portal, automatic payment plans, and SMS payment reminders ensure you can reduce late payments and improve your cash flow with minimal time investment.
Try Chaser free for 10 days and get paid faster.
