Unpaid invoices: How to chase payments and protect your cash flow

Published Thursday 4 September 2025

Table of Contents

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

Key Takeaways

• Implement a systematic follow-up process starting with a polite payment request email as soon as an invoice becomes overdue, then escalate through overdue invoice stamps, phone calls, and ultimately debt collectors or legal action if necessary.
• Establish preventive measures by requesting partial payment upfront, offering payment plans for large invoices, and conducting credit checks on new clients to reduce the risk of unpaid invoices.
• Utilise accounting software to automate invoice reminders and track outstanding payments weekly, catching overdue accounts within days rather than weeks to dramatically improve collection success rates.
• Apply immediate consequences for non-payment by pausing work until outstanding invoices are paid and charging late payment fees (when included in contract terms) to incentivise timely payment.

How do unpaid invoices affect your business?

Unpaid invoices are bills that remain outstanding past their due date, directly threatening your business's financial stability.

When unpaid invoices accumulate, they create three critical problems:

• Cash flow disruption: You can't cover essential operating costs like rent, supplies, or payroll
• Financial planning breakdown: Uncertainty makes it impossible to budget or invest in growth
• Supplier relationship strain: Late payments to your own vendors damage your credit rating

Unpaid invoices can affect your relationships with suppliers, as you may struggle to pay them on time. This can impact your credit rating and make it harder to secure future work. Staying on top of payments helps you maintain strong business relationships.

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

Payment request letters resolve most late payment issues with a simple, professional reminder.

Send your payment request as soon as an invoice becomes overdue. This first contact serves two purposes:

• Genuine oversight: Most late payments are accidental – a polite reminder gets you paid quickly
• Documentation: Creates a paper trail for intentional non-payment, supporting future legal 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

Write a brief, professional reminder about the outstanding invoice. Greet your client, mention the invoice number, due date, and amount owed. Ask when you can expect payment and remind them of your payment terms.

You do not need to include what the payment was for, as those details are already on the original invoice.

2. Send an overdue invoice

Overdue invoices escalate urgency by marking your original invoice with an "overdue" stamp, creating visual pressure for payment.

This formal reminder works because it:

• Increases visibility: The overdue stamp makes non-payment impossible to ignore
• Shows seriousness: Demonstrates you're actively tracking late payments
• Maintains professionalism: Avoids confrontational language while applying pressure

Attach the stamped invoice to a follow-up email that references your original payment request.

Add invoice reminders to your accounting routine to follow up on late payments quickly. You can do this manually or use automated invoicing software to send reminders until you receive payment.

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.

Sending a statement of accounts helps you chase multiple unpaid invoices at once. Follow up with a phone call to let your client know you have sent the statement.

4. Make the phone call and prepare to negotiate

Phone calls achieve the highest success rates for collecting unpaid invoices because direct conversation eliminates the ability to ignore your requests.

Conversation structure for maximum effectiveness:

1. Opening: Greet professionally, then immediately reference specific unpaid invoices by number and date
2. Request: Ask directly when you can expect payment
3. Wait: Stay silent after asking – this pressure encourages them to commit to a date
4. Confirmation: Don't end the call without securing a specific payment timeline

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.

Choose a payment negotiation strategy that works for you. If you are not comfortable negotiating on the phone, ask your bookkeeper or accountant to help.

5. Charge a late payment fee

Late payment fees incentivise on-time payment by adding financial consequences to delays.

Effective fee structure example:

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

Always include your late fee policy in your contract terms. If you add fees without prior agreement, they may not be legally enforceable and could harm your client relationships.

Keep your late fee policy simple to encourage on-time payment. If a customer pays late, let them know you have added the late fee. As a goodwill gesture, you can offer to waive the fee if they pay quickly, for example, within 48 hours.

6. Cut them off until outstanding invoices are paid

If a customer is not paying or responding, pause your work until you receive payment. Protect your business by only working with clients who pay for your services.

Let your client know you will resume work once all outstanding invoices are paid. This helps you protect your business and maintain healthy cash flow.

7. Hire a debt collector

Debt collection services professionally recover unpaid invoices when clients become unresponsive or refuse to pay.

When to use debt collectors:

• Client ignores multiple payment requests
• Phone calls go unanswered or are refused
• You lack time to pursue collection yourself

Debt collection fees usually range from 5% to 25% of the recovered amount. In the UK, you can pass these costs to the debtor, so the service may not cost your business anything.

You can find approved debt collection service providers directly through the Xero App Store.

8. Call in the lawyers

If a debt collector cannot recover your unpaid invoices, consult a lawyer. The legal action you take will depend on whether the debtor is a sole trader, partnership or company. You can also take the client to a small claims court to recover the debt.

Legal action can be complex, so consult a lawyer who specialises in debt recovery. Your debt collector may also have in-house legal experts or can refer you to a lawyer.

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

Tips for avoiding late payments

To avoid chasing outstanding invoices, focus on getting paid on time. Use these tips:

Set time aside to track outstanding invoices

Invoice tracking prevents late payments by catching overdue accounts within days, not weeks, dramatically improving your collection success rate.

Effective tracking system:

• Weekly review: Check all outstanding invoices every Monday
• Immediate action: Send payment reminders within 3 days of due dates
• Relationship benefit: Early, gentle reminders maintain client goodwill better than aggressive late-stage collection

Take partial payment upfront

You can avoid losing out on payments 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

You can also offer a payment plan, so clients pay in instalments instead of all at once. This could follow work phases, for example, 25% upfront, 25% halfway through, and 50% once completed. If a client is struggling to pay after the work is done, offer a payment plan to break the payment into more manageable amounts – for example, over three months.

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

Use Xero accounting software to automate sending invoices and reminders. This helps you prompt customers to pay on time, saving you time and reducing stress.

When you still don't receive payment

Write off the unpaid invoice

If you use the accrual-based method of accounting, you must deal with unpaid invoices to ensure you pay the correct tax. If you have already paid tax on expected income, write off the invoice to claim the tax back.

To write off an invoice, you must show your local tax authority that the unpaid invoice is a bad debt. You can use your correspondence with the client as evidence. Xero accounting software helps you track, manage, and write off bad debts.

If you use the cash method of accounting, you do not need to write off unpaid invoices. Just do not include the amount in your income statements.

Perform credit checks on prospective clients

Carry out credit checks on new clients before you agree to work with them. A positive credit score shows they pay bills on time, so you are less likely to chase payments.

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

Outstanding invoices are all your unpaid bills, whether they are overdue or still within the payment period.

Past due invoices are your outstanding invoices that have passed their payment deadline and need your immediate attention.

The key difference is that outstanding invoices may still be current, but past due invoices are late and need you to take action.

Download Xero's free invoice template

Use Xero's invoice template to create and send invoices easily. Set early payment dates to get paid faster. With Xero's live payment times, you can track how long your clients take to pay.

Download Xero's free invoice template.

Stay on top of your invoicing with Xero

Chasing payments takes time and energy. With Xero online invoicing software, you can send automated reminders, offer multiple payment options, and track your invoices from anywhere. Spend less time on admin and more time running your business. Try Xero for free to see how it can help you manage cash flow and streamline invoicing.

FAQs on unpaid invoices

What happens if you don't pay an invoice in New Zealand?

If you do not pay an invoice in New Zealand, the business you owe can take steps to recover the money. They may start with reminders, then use a debt collection agency or take legal action through the Disputes Tribunal or District Court, depending on the amount.

How long should I wait before chasing an unpaid invoice?

Follow up as soon as an invoice is overdue. Send a polite email or reminder through your accounting software the day after the due date. Prompt follow-ups help you avoid long delays.

Can I stop providing services if invoices are unpaid?

Yes, you can pause or stop providing services to a client who has not paid. Let them know clearly and professionally that you will resume work once they pay the overdue invoices.

Do I need a lawyer for small unpaid invoices?

For small unpaid invoices, use the Disputes Tribunal in New Zealand instead of hiring a lawyer. It is a simpler, less formal way to resolve disputes without legal representation.

What's the best way to maintain client relationships while chasing payments?

Be professional, polite, and persistent. Start with gentle reminders and assume it was an honest mistake. If you need to escalate, keep your communication clear and factual. Offer a payment plan if your client is facing temporary cash flow issues.