How to Collect Unpaid Invoices

Find out how you can collect unpaid invoices and compare ways to cover your business’ costs with Savvy.

Last updated on June 17th, 2022 at 04:31 pm by Thomas Perrotta

How to collect unpaid invoices from your customers

Any business which deals in charging invoices will experience the pain of having customers not follow through with timely payments. Not having these funds available can restrict your business’ cashflow, which is avoidable. Find out more about the ways to obtain invoices, as well as other finance options, with Savvy.

How do I collect unpaid and overdue invoices from customers?

There are a number of methods you can use when it comes to chasing up customers to pay your outstanding invoices. Firstly, it’s important to go through the initial steps of contacting your clients. These may involve:

Send an email reminder

Many businesses begin with a polite email reminding their customer that they’re yet to pay their invoice/s. You may find that this works for your business, but emails aren’t the most effective way to get your clients to pay.

Call them directly

Business operators who contact their customers by telephone to remind them to pay their invoices usually see better results compared to those who email. This approach is much more personal and direct, which is likely to be beneficial in prompting your customer to submit their payment.

Send an overdue notice

Resending your original invoice marked as overdue may also help your clients make their payments. This can create a greater sense of urgency if their original agreed payment date has passed, thus spurring them on to make good on the agreement and advance the funds to you.

It might be worth repeating these three steps several times more if your client still hasn’t paid. If these initial steps are unsuccessful and you’re finding it difficult to make contact or extract the funds from them, though, you’ll need to ramp up your approach to ensure what is owed to you is paid. Some of the next steps you can take as an operator in this situation include:

 Enforce late fees on top of the invoiced amount

You’ll need to give sufficient and clear warning of this occurring before you charge your client any late fees, as well as laying this out clearly in your original agreement. You should warn them if they’re approaching the deadline for late fees, but should they not pay after notice has been given, you can resend an invoice with this charge included.

Seek out the help of a debt collector

If you’ve exhausted other options, you may then turn to a debt collection agency to recoup the funds which are owed to you. These agencies are generally effective when it comes to obtaining the funds required for your business, but it’s important to bear in mind they’re likely to cost a significant portion of the invoice value for their services.

Pursue legal action

Should your debt collector fail in their pursuit of the funds, you can turn to legal action as a last resort. This process may be costly and complicated but comes with a high likelihood of success if your business has done the right thing and chased up the client repeatedly to no avail.

While some (or all) of these may work for your business, what they may not cover is the short-term hit to your cashflow which outstanding invoices can cause. Fortunately, there are other alternative methods of financing which you can pursue to help your business cover its losses whilst its invoices remain outstanding. These include:

Invoice financing

This type of finance is designed specifically for businesses which are looking to obtain funding for their invoices immediately, rather than waiting for their clients to pay them. It boosts their cashflow in the short-term, giving them the revenue they need to continue to support their business. There are two types of invoice financing to consider:

  • Invoice factoring: your business sells its invoices to a third-party, who pays up to 95% of its value upfront and seeks out payment from your client. Once obtained, they advance the remaining amount to you, minus service fees.
  • Invoice discounting: your business takes out a line of credit secured by the value of its outstanding invoices and receives up to 90% of their value upfront. You’ll pay interest on the amount outstanding and are given the responsibility of pursuing the invoices yourself, often making it a cheaper process in terms of fees.

Unsecured business loans

Failing this, though, you might simply decide to take out an unsecured business loan to cover the deficit while you’re waiting for your client to pay. These are a more accessible option for small businesses who may not have the infrastructure in place to be approved for invoice financing, as it usually requires businesses to have relatively robust accounting systems to qualify.

These loans can be taken out over as few as three months (up to a five-year maximum) and span borrowing ranges from $5,000 to $500,000 without the need for asset collateral. Additionally, the funds you’re approved for can be used across any facet of your business and distributed how you like. As such, you may consider an unsecured business loan to be a viable and suitable alternative to invoice financing.

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If your business is looking at sourcing the funds it needs elsewhere, it’s worth considering business loan offers from our trusted lending partners here.

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Further questions about how to collect outstanding invoices

If my business doesn’t end up receiving invoice payments, will I still have to pay tax on it?

No – there won’t be any tax charged on your business’ revenue if you don’t receive payment from your invoice. You may decide to write off the invoice if you haven’t had any luck, as it may not be worth the effort to pursue other, more extreme avenues. If you’ve already paid tax on expected income, you can claim it back on your return by having it written off as lost income.

How can I make sure my business’ customers are reliable?

One thing you should always do before entering business with a client is to do some research into them. See if you can find any reviews from other organisations who’ve worked with them and look into their credit references to determine whether they’ve been successful and reliable in the past. If your research uncovers some negative information, you can exercise your judgment and potentially avoid working with them.

Should I cut off my customer’s supply if they aren’t paying their invoices?

This is another way to enforce the payment of overdue invoices, but this shouldn’t necessarily be amongst the first steps taken by your business. If you’ve given ample warning and explained the consequences, you might cut off their supply to try to force their hand. This is an approach which is likely to ruffle feathers, though, so be prepared for the business relationship to end after you do so.

How much should I charge as a late fee for outstanding invoices?

Your business’ late fee is entirely up to you. You may charge a small fee of 2% and escalate it as time passes further from the original due date, but different approaches will suit different businesses. What you should ensure is that these are clearly laid out in the terms of your contract and you give prior warning to your customer before charging them on the unpaid invoice.

How should I compare invoice finance offers?

Perhaps the most important area in which to compare invoice financing is the fees which your business is set to be charged for the third party’s service. You could potentially save hundreds of dollars by doing so, making it an important aspect of the process. Additionally, you should consider what percentage of your invoice’s value you can receive upfront, as you may wish to select a financier who can provide more value immediately.