As an entrepreneur or a small business owner, you may have faced situations where unpaid invoices kept piling up, making a huge dent in your cash flow and affecting your payments to employees, vendors, and suppliers. Well, you’re not alone.
A 2021 survey indicates that 30% of small businesses believe late payments are affecting their ability to keep the business open. Further, 40% have (or have considered) delayed hiring, 39% have delayed purchasing inventory, and 36% have considered cutting employee hours due to the same reason.
To avoid disruptions in cash flow and ensure all your clients pay on time, it’s important to have a strategy in place. In this article, we share some key steps that you can take to overcome the hurdles caused by late payment and overdue invoices. But first, let’s try and understand what causes an overdue invoice in the first place.
There can be many reasons why a client defaults on payments. Let’s have a look at some of the most common causes:
Technical glitches and miscommunication: Sometimes some invoice might not go through to the client due to a system error; other times, invoices may get lost in email chains. Lack of proper communication and technical glitches often cause an overdue invoice.
Financial crunch: At times, a client might be facing financial problems that are stopping them from paying you. Since they aren’t delaying the payment intentionally, you can always renegotiate the payment terms in such cases.
Global catastrophe: Sometimes, entire markets crash when there is a natural calamity or an unprecedented threat to businesses. New to this list is the global pandemic that has caused a massive rise in overdue invoices.
Whatever the situation be, there are always steps you can take to get your overdue invoices paid on time and maintain your cash flow. Let’s go through these steps.
Running a background check on your clients is a preemptive but crucial step. Reviews on third-party websites often provide tell-tale signs of whether the client has had past records of not paying on time.
If you’re working with a local client then asking around in your network can also be helpful. This step helps you assess the client and request upfront payment to avoid unpaid invoices.
The first thing to do with a client whose payment is overdue is to send a polite payment reminder email to them. At this point, you don’t know what’s causing the delay and it’s best to stick to a polite email that lets the client know the invoice is past its due date. Remind them of the payment terms, a late payment penalty if you have one, and attach the original invoice for reference.
If a payment reminder email doesn’t work, call them. Just like your email, be polite and professional over the phone. At this stage, try to secure payment over the phone by getting a credit card number.
However, if that’s not possible, establish how soon the client can release payment. Get them to agree to a specific date by which they will pay you.
Sometimes clients default on payments unintentionally and they might be facing financial issues. In such cases, you can reach out to them and discuss a payment plan. For instance, instead of the full payment, they could pay you the due in installments.
Not only does this help you recover payments but also builds better relationships with your clients.
If calling the client doesn’t help, try contacting their finance team instead. Usually, the billing department will have more information about the status of your outstanding payment. This makes them the best source to get a real understanding of the timeline for your payment.
You may be working on a long-term project with your client. If payments are not coming through, it’s time to stop the project altogether. Putting such pressure on a client often results in receiving the overdue payment.
However, it’s best to be wary of such clients and not take their business in the future.
If you have overdue invoices that are no more than 90 days old, you can submit them to a factorer. A factorer takes your outstanding invoice and pays you up to 80% of the total amount that you were due.
The only limitation with invoice factoring is that your clients must be organizations or businesses and not individuals.
If multiple attempts to contact the client have failed, arbitration is a good option. This involves a debt collection agency sending out a debt collector on your behalf to collect payment from your clients.
As the last resort, you can finally take the matter to a small claims court. However, a legal battle can cost you a lot in terms of time and money. Make sure to assess if it’s worth taking the matter to the court.
The best solution to get overdue invoices paid is to never have them in the first place. As a small businessman or a freelancer, you can offer discounts on early payments and include a penalty on late payments. These tactics are helpful measures against clients who are likely to default on payments.
Also, when you enable technology to handle overdue invoices, it makes it easier to focus more on projects than worrying about your finances. Here are some additional benefits of using a dedicated software tool for the job:
With the help of billing and invoicing software, you can automate the process of invoice management and open up new and faster ways for clients to pay.
With manual invoice management, it’s easy to get lost in paperwork. And clients often end up hiding behind long email chains and constant back and forth with the finance team to avoid payments. A software solution with automated email management feature sends monthly or even weekly reminders for when the invoice is due.
Clients pay faster when they have multiple payment options available. Also, online payment portals make it more convenient for clients to pay, and you receive the payment instantly.
Some software tools offer a phone call management feature that allows you to record and transcribe phone conversations with clients to store vital information. Some tools also feature conversational IVR that allows clients to reach out and know if they have any open invoices or an outstanding balance.
Software tools also help make client communication better. With multiple channels for interactions, it becomes easier for your business to handle customers and improve your client relations.
Needless to say, when you invest in invoice management technology it helps you maintain a steady cash flow, strengthens your company’s accounts receivable, and filters out good clients from bad ones.
Below are some software solutions you can use.
Accounting software: Automates your financial functions, takes care of payments, and consolidates all your financial data in one place for easy access.
Debt collection software: Manages overdue invoices on behalf of your business and eliminates manual work required for communicating with clients and keeping tabs on late payments.
Accounts receivable software: Tracks all your incoming cash flow transactions and provides real-time access to client and vendor information.
The applications selected in this article are examples to show a feature in context and are not intended as endorsements or recommendations. They have been obtained from sources believed to be reliable at the time of publication.