How to deal with unpaid invoices and get paid faster

Published Thursday 2 April 2026

Table of contents

• What is an unpaid invoice?
• What's the difference between outstanding and past due invoices?
• How do unpaid invoices affect your business?
• How to chase late payments
• When you still don't receive payment
• Tips for avoiding late payments
• Download Xero's free invoice template
• Streamline your invoicing with Xero
• FAQs on unpaid invoices

Key takeaways

• Implement a structured escalation process starting with polite payment request emails, followed by phone calls for direct negotiation, and finally formal demand letters before considering debt collection or legal action.
• Prevent late payments by requesting partial payment upfront, performing credit checks on new clients, and using automated invoicing software to send consistent payment reminders without manual effort.
• Stop all new work immediately for clients with unpaid invoices to protect your cash flow, and clearly communicate that no further services will be provided until outstanding payments are received in full.
• Track your accounts receivable regularly and set up automated reminder schedules to catch overdue payments early, as prompt follow-up significantly improves your chances of getting paid quickly.

What is an unpaid invoice?

An unpaid invoice is any invoice that hasn't been paid by the customer. It may still be within the payment window (outstanding) or past the due date (overdue).

Unpaid invoices are a normal part of running a business, with one report finding that nearly 60% of invoices are paid late. However, when payments are consistently late or ignored, they can create serious cash flow problems that affect your ability to pay suppliers, staff, and other operating costs.

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

Outstanding invoices are all unpaid invoices you've issued, whether still within the payment window or past due.

Past due invoices (also called overdue invoices) are a subset of outstanding invoices that have passed the agreed payment date. These require immediate attention.

The key distinction: all past due invoices are outstanding, but not all outstanding invoices are past due.

How do unpaid invoices affect your business?

Unpaid invoices disrupt your cash flow and make it harder to cover essential operating costs. Late payments happen occasionally, but when they become frequent or drag on too long, the impact compounds.

Cash flow problems from outstanding invoices can affect your business in several ways:

• Supplier relationships suffer: If you can't pay your own bills, suppliers may limit credit or stop working with you
• Credit rating drops: Missed payments to vendors can damage your business credit score
• Future work becomes harder to secure: A damaged reputation makes it difficult to win new clients or contracts

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

Common reasons clients don't pay

Understanding why a client hasn't paid helps you choose the right approach. Common reasons include:

• Simple oversight: They forgot or missed the invoice in their inbox
• Administrative errors: Wrong email address, missing purchase order, or invoice sent to the wrong contact
• Cash flow problems: They're waiting on their own payments before they can pay you
• Disputes: They're unhappy with the work or questioning the invoice amount
• Intentional avoidance: They have no intention of paying

For oversights and errors, a polite reminder is usually enough. Cash flow issues may require negotiation or payment plans. Disputes need direct conversation to resolve. Intentional avoidance requires escalation.

How to chase late payments

Write a payment request letter or email

A payment request letter is a polite reminder sent when you first notice a payment is overdue. In most cases, this simple prompt is enough to get your customer to pay.

If the late payment is intentional, your request letter creates a paper trail for any further action you may need to take.

Why you need a payment request letter

Acting quickly and professionally helps you avoid delays, check if the error was made in good faith, and get paid.

How to structure your payment request letter

Keep your payment request letter brief and professional. Include these key elements:

• Invoice details: Reference the specific invoice number, due date, and amount owed
• Payment request: Politely ask when you can expect payment
• Terms reminder: Briefly restate your payment terms

You don't need to describe what the payment was for. Those details should already be on the original invoice.

Send an overdue invoice

An overdue invoice is your original invoice with an "overdue" stamp that signals urgency. Send one if your payment request letter doesn't get a response.

Attach the stamped invoice to a follow-up email as a formal reminder. This escalates the urgency while keeping your communication professional.

Set up an invoice reminder schedule as part of your accounting routine. This helps you follow up promptly and keeps customers aware of what they owe.

You have two options:

• Manual tracking: Set calendar reminders to check and follow up on outstanding invoices
• Automated reminders: Use invoicing software to send payment reminders automatically until you receive payment

Send a statement of accounts

A statement of accounts summarises all outstanding payments from a single client in one document. Use this approach when you have multiple unpaid invoices with the same customer.

Accounting software can help you consolidate these invoices automatically.

This step won't necessarily reduce your overdue invoices on its own. However, it streamlines your admin by letting you chase multiple payments in one go. Follow up with a phone call to make sure they've received and reviewed the statement.

Make the phone call and prepare to negotiate

Phone calls get the best results for chasing unpaid invoices. It's much harder for a customer to ignore you when you're speaking directly.

Have a loose structure in mind so the conversation stays focused:

1. Identify the invoices: After greetings, mention the specific invoice numbers and dates
2. Request a payment date: Politely ask when you can expect payment
3. Wait for their response: Stay silent, even if they hesitate, to encourage them to commit to a date
4. Confirm before ending: Don't hang up until they've provided a specific payment date

You may need to negotiate payment terms. For smaller amounts the client can pay soon, you might agree to extend the deadline but pause any new work until you receive payment.

If you're uncomfortable negotiating yourself, ask your bookkeeper or accountant to handle the call on your behalf.

Charge a late payment fee

A late payment fee adds a charge when invoices aren't paid by the due date. This gives clients a financial incentive to pay on time.

State your late fee policy clearly in your payment terms before starting work. Keep the fee simple rather than calculating percentages:

• Due by 1 June: $100
• Due after 1 June: $110

If a client misses the deadline, notify them that the fee now applies. To maintain goodwill, consider waiving the fee if they pay within 48 hours.

Cut them off until outstanding invoices are paid

Stop working for clients who aren't paying or responding. Continuing to deliver work puts your business at risk when a client shows no interest in paying.

Inform the client clearly: no further work until you receive payment for all outstanding invoices in full. You may lose the client, but protecting your cash flow comes first.

Send a final demand letter

A final demand letter is a formal written notice before you escalate to debt collection or legal action. It creates official documentation and gives the client one last chance to pay.

Your final demand letter should include:

• Outstanding amount: The exact sum owed, including any late fees
• Final deadline: Typically 7 to 14 days from the letter date
• Consequences: Clear statement that you'll pursue debt collection or legal action if you don't receive payment
• Payment instructions: How and where to send payment

Send the letter by recorded delivery or email with read receipt so you have proof the client received it. Keep a copy for your records.

Hire a debt collector

A debt collection service can recover payment when a customer stops cooperating. While this step may strain the relationship, it's a common escalation after other methods fail.

Key details about debt collection costs:

• Typical fees: Agencies often charge contingency fees ranging from 15% to 50% of the invoice amount, depending on the age of the debt. Learn more about debt collection costs.
• Cost recovery: Under UK law, you can pass the costs of collecting the debt onto the debtor

Find approved debt collection service providers through the Xero App Store.

Call in the lawyers

Legal action is your last resort when debt collectors can't recover your payment. The type of action depends on the debtor's business structure: sole trader, partnership, or company.

Your options include:

• Small claims court: Suitable for smaller amounts with simpler procedures; for example, in the UK, you can make a small claim if your claim is for £10,000 or less.
• Formal legal proceedings: For larger debts or complex disputes

In most jurisdictions, you can legally pursue unpaid invoices for up to six years, as specified in the UK by the Limitation Act 1980. However, practical considerations like legal costs and likelihood of recovery may make this unrealistic for smaller amounts.

Consult a specialist lawyer with experience in invoice recovery. Your debt collector may have in-house legal expertise or can refer you to someone. Check the disputes register in your region for more information.

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

When you write off an unpaid invoice, you remove it from your accounts receivable and may reclaim tax you've already paid on expected income. Businesses often set a policy for writing off an account after 90 or 120 days of non-payment.

How you handle it depends on your accounting method:

Accrual-based accounting:

• You report income when you invoice, not when you receive payment
• If you've paid tax on expected income, write off the invoice to claim it back
• Prove to your tax authority that the invoice is a "bad debt" using your correspondence with the client. For example, tax authorities typically require you to wait until you can prove a specific debt is uncollectible before you can deduct it.

Cash-based accounting:

• You only report income when you receive it
• No write-off needed, just don't include the amount in your income statements

Xero can help you track, manage, and write off bad debts in your accounting.

Tips for avoiding late payments

Chasing payments takes time away from running your business. These prevention strategies help you get paid on time and reduce the need for follow-up.

Set time aside to track outstanding invoices

Schedule regular time to review your accounts receivable. Spotting outstanding invoices early and sending prompt reminders helps you recover payments faster and maintain stronger client relationships.

Take partial payment upfront

Request partial payment upfront to reduce your risk and improve cash flow. You can also offer a prompt payment discount, such as 2% off if the client pays within 10 days, to get cash in well before the due date.

Common upfront payment structures:

• Deposit: Covers your core costs before work begins
• Percentage split: For example, 50% upfront and 50% on completion
• Milestone payments: Tie payments to project phases for longer engagements

Make upfront payments part of your standard payment policy for all new clients.

Offer payment plans to clients

Payment plans let clients pay in instalments rather than all at once. This approach works well for large invoices or long-term projects.

Two common scenarios:

Milestone-based payments (before work is complete):

• 25% upfront
• 25% at project midpoint
• 50% on completion

Recovery payment plans (after work is complete):

• Break an overdue invoice into manageable monthly payments
• Helps clients with cash flow issues while ensuring you get paid

Payment plans strengthen client relationships and improve cash flow for both parties.

Perform credit checks on prospective clients

Check a client's credit to reveal their payment history before you agree to work with them. A customer's credit score shows whether they pay bills on time and repay debts reliably.

A positive score suggests they'll pay you promptly with minimal chasing. Consider making credit checks part of your onboarding process for larger projects or new clients.

Use accounting software like Xero

Xero automates invoice reminders so you don't have to chase payments manually. The software sends prompts on your behalf until customers pay.

Key benefits:

• Saves time: No manual follow-up required
• Reduces stress: The system handles reminders automatically
• Prevents late payments: Consistent prompts keep invoices top of mind for clients

Download Xero's free invoice template

With Xero's invoice template, you can create and send invoices quickly. Set clear payment dates to help you get paid faster, and track how long it takes for your clients to make payments.

Download Xero's free invoice template.

Streamline your invoicing with Xero

When you chase overdue invoices, it takes time and energy you could spend on your business. Xero's automated invoicing handles reminders for you, so you only get involved when it's serious.

Xero's invoice management tools integrate with your accounting system to help you:

• Track outstanding invoices in real time
• Send automatic reminders before payments become overdue
• Reduce late payments with consistent follow-up

Ready to simplify your invoicing and get paid faster? Get one month free.

FAQs on unpaid invoices

Here are answers to common questions about managing unpaid invoices.

What qualifies as an unpaid invoice?

An unpaid invoice is any invoice the customer hasn't paid. It can be within the payment terms (outstanding) or past the due date (overdue).

How long can I legally chase an unpaid invoice?

In most jurisdictions, you can pursue unpaid invoices for up to six years under simple contract law. However, collection costs and likelihood of recovery may make this impractical for smaller amounts. Check your local regulations as timeframes vary.

When should I hire a debt collector?

Consider a debt collector when you've exhausted direct communication, the amount justifies collection fees (typically 5% to 25%), and the client has stopped responding entirely.

Can I charge interest on unpaid invoices?

In many jurisdictions, yes. However, you must state your late payment terms clearly in your initial contract or invoice. For example, statutory interest rates for commercial debts vary by jurisdiction. Check your local regulations for applicable rates.

Should I continue working for a client who has unpaid invoices?

No. Pause new work until you receive payment for outstanding invoices. This protects your cash flow and signals that you value your services appropriately.