Chasing outstanding invoices: 8 ways to help you get paid

How do unpaid invoices affect your business?

Being paid late from time to time is going to happen. But if it happens too regularly, or the payment window is too long, it can have a drastic effect on your business. Outstanding invoices disrupt your cash flow, making it hard to cover your essential operating costs and financially plan for your business.

For instance, unpaid invoices can put a strain on your other business relationships, like with suppliers, because if you haven’t been paid then you won’t be able to pay them either. This could impact your own credit rating and professional relationships, making it difficult to get work in the future. If you don’t watch out, you could be the one being chased for late payments!

Successfully invoicing and managing unpaid invoices is crucial to sustain your business’s long-term financial health.

How to chase late payments

1. Write a payment request letter or email

When you first notice your payment is overdue, send a polite payment request letter or email. In most cases this will be enough to prompt a customer to make a payment. Alternatively, if the late payment is intentional, the payment request letter will set the stage for any further action.

Why you need a payment request letter

It’s important to act quickly and professionally to avoid delays, check if the error was made in good faith, and ultimately get paid.

How to structure your payment request letter

Your payment request letter should be a brief reminder of the outstanding invoice, and communicated in a professional tone. Start with a usual greeting and then remind them of the unpaid invoice, including the specific invoice number, due date, and amount owed. Politely ask when you can expect payment and offer a brief reminder of your payment terms.

You don’t need to stipulate what the payment was for – those details should already be on the original invoice.

2. Send an overdue invoice

If the request letter doesn’t get a response, the next step is to send an overdue invoice.

An overdue invoice is essentially the original invoice except it has an ‘overdue’ stamp to give a greater sense of urgency. You can attach this stamped outstanding invoice to a follow-up email to serve as a formal reminder to your customer.

Setting up an invoice reminder schedule to your accounting routine will help you to promptly follow up on late payments, and ensure customers are aware of their outstanding invoices. You could carry this out manually, or use automated invoicing software to send payment reminders on your behalf until payment is received.

3. Send a statement of accounts

If you have multiple unpaid invoices with the same client you could send them a statement of accounts which summarises all of the outstanding payments. Accounting software can help to consolidate your unpaid invoices into one document.

This step by itself won’t necessarily reduce your overdue invoices. However, it’ll help you streamline your admin by chasing multiple unpaid invoices in one go. Consider following up with a phone call to notify them of the statement of accounts.

4. Make the phone call and prepare to negotiate

If your emails have been ignored, it might be time to give your client a call. Businesses that chase unpaid invoices by phone tend to get the best results – it’s much harder for a customer to ignore you if they’re speaking to you directly!

It’s best to have a loose structure in mind for the conversation so that it’s succinct and productive:

1. After initial greetings, mention the unpaid invoices and identify which invoices you’re referring to, e.g. by their invoice number and/or date.
2. Politely ask when you can expect the payment to be made.
3. Wait for their response. It’s best to be silent here, even if they’re not forthcoming, to encourage them to name a date.
4. Do not end the call until they’ve provided a payment date.

You may need to negotiate the terms of when you’ll receive payment. For instance, if the unpaid invoice is a relatively small amount which they can pay soon, you may agree to move the payment date but refuse to carry out any more work until payment is made.

Learning which payment negotiation strategy suits your situation is key. If you’re uncomfortable dealing with overdue invoices on the phone and negotiating yourself, you could ask your bookkeeper or accountant to handle it on your behalf.

5. Charge a late payment fee

Having a late payment fee can provide an incentive for clients to pay you on time. However, any late-fee policy you use should be clearly communicated upfront in your payment terms when you agree to carry out work for your customer.

Some businesses quote it as a percentage of the original amount due but it’s easier to do the maths for the customer and have a single fee to add on. For example:

• Total due by 1 June: $100
• Total due after 1 June: $110

Keeping it simple will motivate customers to pay on time. If they don’t pay on time, however, notify them that the late-fee has now been charged. For good will, you could offer to waive the late fee if the customer pays quickly (for example, within 48 hours).

6. Cut them off until outstanding invoices are paid

If a customer isn’t paying you or responding to your messages, it’s unwise to continue to work for them until you know you’ll be paid. You shouldn’t put your own business at risk when working with a client who potentially has no interest in paying for your services.

Inform the client that you won’t continue any work until all outstanding invoices have been paid in full. You may lose the client over this decision but it’s a necessary move to protect your business.

7. Hire a debt collector

Debt collectors specialise in recovering unpaid invoices so having a professional on side can help you get paid if the customer is no longer being cooperative. This step escalates the situation and could end the relationship with the customer, so it’s best to exhaust all other strategies for chasing invoices first. Debt collectors also take a cut of what you’re owed, typically around 25%, so you’ll need to factor that into the decision.

8. Call in the lawyers

If a debt collector can’t help or doesn’t succeed in resolving your outstanding invoices, your last resort is to consult with a lawyer. The type of legal action you’ll need will depend on the debtor’s organisation, including whether they’re a sole trader, partnership or company. You could also explore other legal avenues such as taking the client to a small claims court to recover the unpaid invoices.

Taking legal action is complex so it’s best to consult a specialist lawyer who has experience in professional invoice chasing. The debt collector you’ve previously worked with might have in-house legal expertise they can offer or refer you to a lawyer, so check with them if that’s the case.

To find out more about legal action, check the disputes register in your region.

Download Xero’s free invoice template

With Xero’s invoice template you can create and send invoices effortlessly. Remember to set early payment dates to help you get paid faster, and with Xero’s live payment times you can track how long it takes for your clients to make payments.

Download Xero’s free invoice template.

When you still don’t receive payment

There are plenty of ways to deal with overdue invoices but sometimes they simply don’t work. Here’s what you can do:

Write off the unpaid invoice

Even if an invoice hasn’t been paid, you’ll still need to deal with it if you use the accrual-based method of accounting (where you report both the money you’ve received and the money you’re expecting) to ensure you’re paying the correct amount of tax. If you’ve already paid tax on the income you were previously expecting, you’ll need to write off the invoice to claim the tax back.

In order to write off an invoice, you’ll need to prove to your local tax authority that the unpaid invoice was a ‘bad debt’. For instance, you could use your correspondence with the unpaying client as evidence. Xero’s software can help you track, manage, and write off bad debts in your accounting.

If you follow a cash method of accounting (where you only count revenue once it’s collected) then writing off the unpaid invoice is unnecessary. Simply make sure not to include the amount in your income statements.

Perform credit checks on prospective clients

Carrying out credit checks on prospective clients before agreeing to work with them can help you to avoid outstanding invoices in the future. A customer’s credit score will reveal whether they pay their bills quickly and if they pay back their debts. If they have a positive score, this is a good indicator that they’ll pay you on time with little chasing up.

Tips for avoiding late payments

Of course, rather than chase outstanding invoices, it’s better to get paid on time in the first place. Here’s some advice:

Set time aside to track outstanding invoices

Spotting outstanding invoices early and sending prompt reminders could lead to payments being recouped more quickly, contributing to better cash flow and stronger client relationships.

Take partial payment upfront

You can avoid losing out on paments in full by requesting partial payment upfront. This could be a deposit, to cover your core costs of doing the work, or a percentage of the overall fee. Having a partial upfront payment as part of your payment policy means you can judge whether a client has any intention of paying for your work and avoid those who don’t. It can also help your business’s cash flow as you’re not waiting for the whole payment to come through later.

Offer payment plans to clients

Similarly to taking a partial payment upfront, you could have a payment plan option where clients pay you in instalments instead of all at once. This could follow work phases, e.g. 25% upfront payment, 25% half way through, and 50% once completed. Alternatively, if a client is struggling to pay once the work is completed due to their own cash flow issues, you could offer a payment plan to break down the payment into more manageable chunks – for instance, splitting it into three months worth of payments.

This system is particularly suitable for large invoices or work that takes place over a long period of time. Using payment plans can strengthen your relationship with the client, bolster cash flow for both of you, and ensure you recoup payments before they become unpaid invoices.

Use accounting software like Xero

Xero’s accounting software can help you stay on top of your finances by automating the process of sending invoices and reminder emails. Prompting customers to pay without you having to be involved saves you both time and stress, and can prevent late payments from occurring.

What’s the difference between outstanding and past due invoices?

‘Outstanding invoices’ refers to all unpaid invoices that have been issued but are not yet paid, whether they are still within the payment period or have passed the due date.

In contrast, ‘past due invoices’ specifically refers to any invoices that have not been paid by the agreed-upon due date. These invoices are a subsection of outstanding invoices, but the key distinction is that they are now overdue and require immediate attention.

Streamline your invoicing with Xero

Dealing with overdue invoices can be an uncomfortable experience, so let Xero take the heat. With Xero’s automated invoicing features you can send invoice reminders and streamline payment collection so you only have to get personally involved when it gets serious.

Xero offers small business invoice management tools that integrate seamlessly with your accounting system, helping you to keep track of outstanding invoices and reduce the likelihood of overdue payments.