Consistent income is the lifeblood of any business. Particularly in times of economic uncertainty, consistent cash flow is crucial for small business owners.
While retail stores and restaurant businesses have the advantage of immediate payments, small suppliers and professional service providers, typically invoice customers for products and services previously rendered. Non-payment or late invoices can affect their day-to-day operations as they don’t have huge cash reserves to fall back on.
Unfortunately, outstanding payments and unpaid invoices seem to be a persistent problem for businesses. In the US, only 36% of all B2B invoices are paid on time. For the average small business, invoices are cleared 8 days after the payment deadline.
With 99% of US businesses classified as small businesses, the issue with past due invoices affects a substantial portion of the US workforce.
Here’s how you can prevent it in the first place and send friendly payment reminders to chase those payments in a way that doesn’t jeopardize your customer relationships or accounts receivable.
What Is a Past Due Invoice?
A past due invoice reflects the charges for services and products you’ve provided to your customers that haven’t been paid for by the invoice due date.
Of course, this affects your bottom line and your ability to pay for daily operations, equipment upgrades, payroll, and other functions that help to grow your business. Chasing invoices past the payment due date isn’t pleasant but imperative.
To tackle the issue and streamline your payment process, you should know the common reasons behind it.
Common Causes of Past Due Invoices
One of the biggest reasons for past due invoices is a client’s cash flow issues. When a client is staring at low fund reserves, they may prioritize other critical expenses than settling bills with vendors.
Sometimes the reason is as simple as oversight or forgetfulness. It’s easy for customers to miss invoices while taking care of more important business tasks—especially for companies that rely on manual invoicing or are just starting out and don’t have all their workflows in order yet. If your clients have inefficient business processes, you may encounter past due invoice issues.
Another reason for past due invoices is incorrect billing. Missing or wrong total amounts, dates, invoice numbers, client names, contact information, or payment options can result in clients requesting corrections and changes. This creates delays and payments can inevitably cross their due dates.
That’s why you need a proactive approach to invoicing. Make sure your invoices are error-free. Also, send regular reminders to clients after invoices have been sent.
Effective Communication for Past Due Invoices
Most people don’t like confrontation. This makes reminding customers about overdue payments an unpleasant task. As a business owner, you need good negotiation skills to deal with customers who haven’t made their payments.
Keep an open mind as there could be legitimate reasons for missed payments. If required, you can delegate the task of following up and collecting payments to employees with good interpersonal and negotiation skills.
Set up a standard process of reaching out to clients with past due invoices to make the process less stressful. Effective communication is key when following up on invoices. Be polite, but firm and professional at all times. Following is a good approach for sending past due invoice email reminders.
First reminder: Friendly follow-up email
Send the first reminder within a few days past the due date. Keep the tone friendly, gentle, and polite. The communication should assume that the delay in payment is a genuine mistake or an oversight.
Ensure this reminder highlights the due date, the number of days past due, the amount due, and the penalty for late payments. Also, request the client to confirm receipt of the original invoice as well as the reminder. Remind the client politely that they can contact your company if they face any issues with payment.
Second reminder: Firm emphasis on overdue status
If the first reminder remains unanswered, send a firmer reminder about a week later. This message should highlight the overdue status of the invoice and the potential late payment fees the customer might incur if they don’t make the payment as soon as possible.
The second reminder takes more skill to draft as it needs to be firm yet professional. You should be able to convey the urgency without seeming threatening.
Final reminder: Warning about next steps
After the second reminder, you can continue sending reminders at regular intervals. The number of subsequent reminders and the time until sending the final notice is something you need to decide for your small business.
When the customer fails to clear overdue invoices after repeated reminders, send them the final notice. Here, the tone can be much stronger and the message should warn the customer of the consequences of unpaid invoices.
Ensure the email’s subject line asks for the client’s immediate attention. Also clarify that, as the next step, you’d either take legal action or refer the matter to collection agencies.
Using phone calls for direct communication
Emails can be easily ignored and difficult to track if customers have received them. Switch to phone calls if your emails go unanswered.
Communicating directly over the phone tells the client you are serious about getting paid. You can also be more personable and sympathetic to your client’s issues over the phone and address some of them quickly.
Payment Reminder Templates
Here are some quick email templates that you can use when reminding customers about overdue payments:
Semi-formal
If you have a semi-formal relationship with your customer and don’t want to use language that’s too heavy, you could word your message along the lines of…
Hi [NAME],
This is a friendly reminder that invoice #12345 is past due. We’ve attached the outstanding invoice in case you don’t have it handy.
We understand that things happen and this could’ve been an oversight, so we’d appreciate your prompt payment. If you already paid the invoice, please disregard this message. Otherwise, can you let us know when we can expect the payment?
Thanks and we look forward to hearing from you.
YOUR NAME AND BUSINESS NAME
Formal
Need a more formal or official-sounding reminder email? Consider the following payment reminder email template:
Dear Mr./Ms./Mrs. [CUSTOMER NAME]
This letter is to remind you of your outstanding balance in the amount of $xxxx. Kindly pay your balance immediately or contact us at [INSERT CONTACT DETAILS] to discuss when we can expect your payment.
We accept all major credit cards, including Mastercard, Visa, American Express, and Discover, as well as ACH payments.
If you have already made the payment, please disregard this message and accept our apologies for any confusion this may have caused.
Sincerely,
YOUR NAME AND BUSINESS NAME
Overdue payment follow-up template
Here’s a quick example of what you could say when following up on late payments:
Dear [CUSTOMER NAME],
This is our 2nd/3rd attempt to collect the payment of $xxxx for invoice #12345. Here is the invoice link: [INSERT LINK].
The invoice was due on [INSERT DATE] so as of today, your payment is [X] days late. Please pay your balance immediately or get in touch at [INSERT CONTACT DETAILS] to discuss your options.
If we don’t hear from you within the next 3 business days, we will have to escalate this issue.
Thank you for your prompt reply.
Sincerely,
YOUR NAME AND BUSINESS NAME
Negotiating Payment Plans
When you’re able to get in touch with a customer with a past due invoice, approach them with empathy and professionalism. Acknowledge their difficulty and demonstrate your willingness to find a solution that works for both of you. However, be prepared that you might not be able to recover all the money that is due.
Offer flexible payment plans
If your customer is facing financial difficulties, you can help them clear their dues by offering flexible payment plans. By breaking down the total due amount into smaller, more manageable chunks, the customer might be able to clear your invoice without added strain on their current situation. This approach also shows the customer you care about them and the business relationship.
Accept a partial invoice payment
If an installment plan disrupts your cash flow, consider accepting a reduced lump-sum amount as full payment for the amount owed to you. For example, you might accept $4,000 for a $7,000 debt. You’ll receive a quick infusion of cash, although the rest of that income is gone forever.
Document everything
When you offer alternate payment plans to your customers, record and document everything properly. All terms and conditions should be clear to both parties and agreed upon in writing.
Preventive Measures to Avoid Past Due Invoices
To reduce the amount of past due invoices your business incurs, being prepared and taking preventive measures can go a long way. Here are a few strategies to ensure timely payments.
Research prospective customers
Take the time to perform some due diligence on potential customers. If you notice one (or more) of these issues during your initial conversations, put a big “red flag” next to the company’s name:
- The business seems disorganized and chaotic
- The business has questionable resources and cash flow
- Your contact repeatedly emphasizes the company’s limited budget
Establish clear payment terms upfront
Make sure you clearly communicate your expectations from the client right off the bat and remove all ambiguity. Inform the customer about your due dates, acceptable payment methods, and penalties for late payments. You should also inform them about the steps your business will take if payment due dates are missed regularly.
Highlight due date and penalties
The due date and penalties for late payments should be highlighted in every invoice. Late fees in the invoice will act as an incentive for clients to pay up on time.
Automate invoicing
Many software solutions can help you generate and send invoices with minimal human intervention. Look into automating your invoicing process to reduce delays caused by errors. An added benefit of automation is that you can save a lot of time and effort. Invoicing software can even send regular payment reminders on your behalf.
Use milestone payments
For large or long-term projects, request deposits or smaller payments at different stages. Once a milestone is complete, clients can pay a portion of the overall fees. Unless this payment is made, you can refuse to move to the next part of the project. This ensures you have a constant cash flow and reduces the risk of a large uncleared bill at the end of the project.
Choose the Right Payment Processor
After you’ve tried every method to get the customer to clear their dues and nothing has worked, it’s time to take some drastic steps. You will have to get your lawyers involved at this stage and be prepared to take your claim to court. Another way would be to hire the services of a collection agency to recover your funds.
Whether you’re invoicing customers, charging subscription fees, or collecting payments over the phone or in person, choose a merchant services provider that supports your billing and collection efforts.
Be sure to opt for a credit card processor that lets you accept all payment types including card-not-present, mobile, and contactless payments. The more flexible you are with accepting and processing payments, the easier it is for your customers to pay.
Need help finding the right credit card processor? Check out Payment Depot.
