When you’re a small business owner, letting even one invoice go unpaid can disrupt your cash flow. Unfortunately, whether due to miscommunication or a forgetful client, most small business owners are used to following up on a stack of unpaid invoices regularly. Not only are you missing the money you’re owed, but you’re also spending your precious time chasing after it.
Unpaid invoices eat up your time and revenue, but there are ways to get clients to pay overdue invoices. Follow these tips to develop a more effective strategy for collecting unpaid invoices.
1. Make Sure Your Contract Is Clear
It’s possible that either you or your client made a mistake, so it’s important to double-check your payment terms before taking any action. You should have a contract in place between the two of you that clearly spells out when payment is due.
If you don’t have a contract in place, you should know that your agreement with the client is most likely still binding. Email conversations, text messages, phone chats, and even in-person conversations can all count as a legally-binding contract, as long as both people verbally agree to the scope and price of the project.
However, having a contract offers your client a tangible reminder of your original agreement and also clear proof of the details of that agreement should you ever need to take someone to court. For that reason, it’s important to always have one.
2. Send Your Invoices Promptly
It’s crucial to keep close track of your invoices if you want timely payments.
It’s easy to get sidetracked when you’re juggling the many duties of running a business. You may have forgotten to invoice a client right away and instead sent the invoice weeks, or even months, later.
When this happens, there’s a greater chance that the client will leave the invoice unpaid for a while. They likely didn’t factor your payment into their budget for that month since the invoice arrived late, so they might not have the funds to pay you right away. Let your client know that you’re sorry the invoice arrived so late and understand if they need an extra week or so to pay it. Ask them for a firm payment deadline that works for them and hold them to it.
3. Set Up Automated Reminders
The longer your invoice goes unpaid, the less likely it is to be paid eventually. Sending out reminder emails several days before a payment due date greatly increases your chances of receiving on-time payment, and sending out a follow-up email to clients with overdue invoices within a few days after the payment becomes overdue makes it far more likely that you’ll receive payment.
The best accounting apps offer the ability to set up automated payment reminders to be sent to your clients. This feature takes the burden off of you to send out follow-up emails and frees up your time to focus on work. It also makes sure that payment reminders are always sent out in a timely fashion. This easy step can make a huge difference.
4. Offer Additional Payment Methods
If you’re consistently receiving late payments, it’s worth considering whether or not the payment methods you accept might be inconvenient for some clients. The easier you make it for clients to pay you, the more likely it is that you’ll be paid on time.
For some clients, a bank transfer might be ideal, while others might prefer to pay by credit card. If you use a bookkeeping app with invoicing features, you might be able to charge them directly through the app by credit card or bank transfer. This option makes the payment process easier on both ends.
5. Implement a Late Payment Fee
As part of your contract, you should include a fee or penalty for late payments. You can give clients a grace period of a week or 30 days before they incur charges. After that grace period, you can charge a flat fee or a percentage of the overall project cost. A fee of 5% or 10% is fairly standard.
Hopefully, you’ll never have to charge a late fee. However, having one in place can provide an extra push to clients who tend to drag their feet when it comes to payment.
6. Set Up Automatic Payments for Recurring Invoices
If you often work with the same clients from month-to-month, using accounting software for small businesses that offers recurring invoices can be a huge help. With this feature, you can set up invoices to be automatically sent out on a recurring basis. You can also set up automatic payments with a client, which is the ideal situation for making sure you’re always paid on time.
In general, an accounting program with a good invoicing system will greatly improve your payment rates.
7. Consider Invoice Factoring
Once your overdue invoices pile starts to add up, it can really put a dent in your cash flow. This situation makes it hard to pay your bills on-time and invest in the growth of your business. If you’ve got unpaid invoices and are in dire need of cash, invoice factoring is always an option.
Invoice factoring, otherwise known as accounts receivable financing, allows you to sell your unpaid invoices to a third party that will collect the funds instead. While you won’t get paid in full, you will recoup some of the money you’re owed, and you’ll save yourself the time of having to track down clients and send out reminders. This option can be good for invoices that are so long overdue that you don’t think the client will pay anytime soon.
You can always resort to legal action as well. You should go through the steps above first, but if clients are still unresponsive, it’s time to decide whether or not the invoice is worth your time and energy. Taking legal action can be expensive and time-consuming, but it might be necessary if the amount you’re owed is large enough.