How to Collect Overdue Payments [with Payment Reminder Letter Templates]

Consistent income is the lifeblood of any small business. That’s especially important as companies gradually resume operations after the COVID-19 lockdown. Although businesses such as retail stores and restaurants rely on “cash and carry” income, suppliers and professional service providers often invoice customers for products and services previously rendered.

When customers don’t pay their bills on time, that can seriously impact the business’ cash flow. View these easy-to-follow steps for collecting overdue payments while ensuring you follow legal and ethical guidelines.

Why You Should Track Those Overdue Payments   

Monitoring overdue payments may not be among your favorite tasks, but you should consistently track them for three important reasons. First, these receivables represent products or services that you have already sold to a customer.

Because you haven’t been paid, that negatively impacts your business’ cash flow. As a result, those funds aren’t available for equipment upgrades, payroll, or another function that would help to grow your business.

In addition, the longer the unpaid invoice sits on your customer’s desk, the less likely they are to pay that bill. In fact, they might be hoping that if they ignore it, you’ll also forget about it. Finally, if you allow an invoice to remain unpaid, you’re effectively telling the customer that non-payment of their bill is acceptable behavior.

Assemble Your Resolve and Resources

Before engaging in the overdue payment battle, understand that obtaining these funds is vital to the growth of your business. Get your documentation in order, and keep the facts accessible each time you contact the customer.

Mental Preparation

First, summon a firm determination to obtain the money owed to you. Realize that this may not be the first time this customer has racked up an overdue payment. Assuming that’s the case, they might have assembled a collection of excuses for not paying their bills on time.

If you honestly lack the negotiation skills to go head-to-head with slow-paying customers, assign this task to someone in your company that will up for the challenge. Ensure that collections work is part of that person’s job, rather than expecting them to handle this often-demanding task in their spare time.

To be fair, the customer could have a legitimate reason for the overdue payment. You may have sent the invoice to the wrong address, or the customer may have been called out of town on an emergency. For that reason, you should listen to their explanation with an open mind.

Invoice Tracking Resources

Many small business owners let late-paying customers fall by the wayside. Sometimes, the entrepreneur is so absorbed in operating the business that they can’t justify the time necessary to track their receivables. Other business owners simply don’t want a confrontation with the customer, which could result in a loss of the business relationship.

To keep apprised of your business’ receivables, direct your accounting software program to generate a weekly list of outstanding invoices. If you prefer, view the list twice per week. The program should also allow you to track late payments according to the amount of time overdue. Begin with invoices that are three days overdue, and continue through the 45-days-late milestone.

How to Remind Customers about Overdue Payments

Using your established overdue payment milestones, develop a workable system for following up on unpaid invoices. As a guideline, initiate an overdue payment friendly reminder after the customer’s payment is three days overdue. 

Payment Reminder Letter Templates

Here are some quick scripts 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 letter along the lines of…

Hi [NAME],

This is a friendly reminder that invoice #12345 is past due. We’ve attached the 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? Consider the following payment reminder letter 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

***

Send a Follow-up Email (or Two)

Let’s say you don’t receive a response to your overdue payment reminder email. Or, the customer confirms that they received the invoice, but they haven’t yet sent payment.

Send another email that states the invoice due date and the number of days the payment is overdue. Attach a copy of the original invoice to this reminder for overdue payment. Advise the customer of any applicable late fees, and state that those fees now apply. Clearly state your business’ payment methods, and offer to help them facilitate their payment.

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 replay. 

Sincerely,

YOUR NAME AND BUSINESS NAME

Initiate a Telephone Conversation

Another option is to pick up the phone. It’s much harder to ignore a phone call than an email requesting overdue payment. In addition, a person-to-person interaction may bring out the real reason behind the non-payment, and potentially facilitate a breakthrough.

During the call, remain calm and polite, and explain that you’ve sent multiple emails about the customer’s overdue payments. Offer to take a credit card payment over the phone, or provide details for a bank transfer.

If that doesn’t work, ask the customer to provide the exact date on which you can expect a payment. Ask them to specify the payment method they plan to use.

Examine Your Available Options

If the customer still hasn’t paid the original invoice in full, consider three other methods of steering some funds to your business’ bank account. Although you may not receive all the money that’s due, you can hopefully resolve the overdue payments issue and move forward.

Offer an Installment Plan

Let’s say the customer does want to pay the invoice, but has been in a severe cash crunch. If they can’t pay the full amount due, design a workable installment payment plan, and ask them to pay a preset amount each month. Ideally, you’d like to tack on interest and late fees, but this could make it even more difficult to get your money.

Accept a Partial Invoice Payment

If an installment plan will play havoc with 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.

Consider Cutting Your Ties

Regardless of how this overdue payment issue is resolved, take a step back and decide if you want to continue doing business with this company. Maybe you’ve had to pursue overdue payments from this customer before. Or, the business is in serious financial trouble, and you’re not sure if they’ll rebound or are in a downward spiral.

If you operate a service business, and are currently working on a project for this customer, consider pausing your work until you receive all monies due. Know that even if you remain calm, and clearly explain why you have made that decision, the customer may react in a defensive manner.

Worst-case Scenario: What If They Won’t Pay?

If you have explored every possible payment avenue, and you still haven’t gotten your money, it’s time to take the overdue payments issue to the next level. Consider increasing the situation’s visibility and adding some consequences for the customer’s failure to pay their bill.

Make a Public Record Complaint

Let’s say you have been diligently following up on the customer’s overdue payments issue, and they haven’t shown any commitment to paying their bills. Consider reporting them to the Better Business Bureau (BBB) or other business reporting organization.

Know that the BBB has no legal authority to make the customer pay their bills. However, a poor payment history can damage the company’s reputation, and could even threaten their future credit. For that reason, this unexpected action could be the single tactic that brings them to quickly open their checkbook.

Bring Legal Action into Play

Maybe you have sent multiple overdue payment emails, and have made several increasingly firm phone calls. After several months, the customer still has not paid their outstanding invoice. Now, it’s time to escalate the situation to the next level: legal action.

Demand Letters and Contracts

Ask your lawyer to craft a “demand letter,” which is a certified written communication that threatens legal action if the customer does not resolve their overdue payment. Chances are, the demand letter will get the customer’s attention, and you’ll receive payment within the very near future.

If you have executed a legally binding contract with this customer, it likely includes the work you agreed to perform, and the amount of payment due upon completion. If the contract states the payment deadline, and shows both your signatures, ask your lawyer if filing a lawsuit is appropriate. Or, consider contacting an arbitration board to resolve the overdue payments issue.

Small Claims Court Case

All 50 states operate small claims courts that enable non-lawyers to have their cases heard. If your claim falls under your state’s maximum limit, you are allowed to represent yourself in court without a lawyer. You will have to pay court fees, but won’t have to worry about attorney fees.

If the customer owes more than the small claims court limit, you’ll need to file a lawsuit in a regular court. In that venue, hiring a lawyer is advisable.

Send the Case to Collections

If you’d rather not take the customer to court, consider hiring a collection agency to recover the unpaid invoice amount. Generally speaking, collection agencies keep a percentage of the funds they recover, sometimes up to 50 percent of the amount due.

Or, the collection agency may simply purchase the debt and collect the money themselves. Either way, you’ll get only a small portion of the amount owed to you. If you choose this option, find a reputable collection agency by reading the Better Business Bureau reviews of local companies.

How to Avoid Overdue Payments

With a little advance preparation, you can greatly minimize the risk that you’ll be stuck with an overdue payment. View these valuable tips that apply to any size or type of business.

Research Prospective Customers

Take time to perform some due diligence on potential customers. If you have noticed one (or more) of these issues during your initial conversations, place 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 

Discuss Your Payment Expectations

If the customer seems financially stable, and you believe you can work together, bring up the subject of payment terms. Clearly state when you expect the customer’s payment following your product or service delivery.

If the customer doesn’t pay the invoice within a specific time period, state if you will apply a late fee, and note the amount of the fee. In addition, be very clear about when (and how) you will take further action. For example, note when you will send the overdue payment to a collections agency or start legal proceedings.

Tips for Service Businesses

To formalize the business arrangement with the customer, present them with a contract that outlines your services and details the compensation you expect upon service delivery. Ensure that the contract includes provisions for due dates, late fees, and further actions if overdue payments occur. 

Invite the customer to read and sign a copy of the completed contract. If they seem resistant to doing that, that’s a “red flag” that could foretell unpaid invoices in your future. If you decide to work with them anyway, get at least 50 percent of your service fees upfront. Or, schedule milestone payments that apply when you complete each phase of a project.

Know that the existence of a contract does not guarantee that you’ll be paid for your services. However, the customer’s signature means that they agree to the contract terms. If you encounter overdue payments issues, you’ll have a more solid footing if you pursue the collection agency or legal action route to obtain your funds.

Choose the Right Payment Processor

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. 

And 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. In addition to supporting various payment types and methods, Payment Depot’s membership pricing model helps merchants save a tremendous amount in credit card processing. On average, our members save over $400 per month.