Small Business Challenges: Collecting on Unpaid Invoices

paymentsFor most businesses to thrive, extending payment terms, rather than collecting payment up front for products and services, is necessary. Unfortunately, not all customers are great with paying their bills on time, and outstanding invoices can put the pinch on your cash flow and negatively impact your operation on numerous levels. Chasing late payments is probably one of the least favorite parts of your job, but failure to act swiftly has serious consequences. Here are some tips for collecting on late invoices.

Jump on Late Payments Immediately

I once worked for a collection agency and when meeting with potential clients, one of the things that astounded me was how old some of their invoices were—they just let them sit there without ever pursuing payment. The chances of collecting payment diminishes significantly the longer you wait. If you act within two months, you have an 81 percent chance of collecting payment—wait six months and that drops to 52 percent. Sit on it for a year? There is less than a 25 percent chance of seeing that money. You may have a fear of offending customers, but you provided something they needed and you deserve to get paid. The contact does not have to be aggressive and stern—it can be congenial. But, you have to act fast. You may want to consider offering a discount for settling the bill—this may move you up to the front of the line of creditors.

Nail Down Specifics

Once you get your customer on the phone, it is important to end that conversation with specifics—vague promises of payment or ending the call with him getting back to you, is not good. You need to establish a plan of action, whether they will be sending payment in full, a partial payment or the first payment in an installment agreement. You should draw up a written document outlining the payment agreement and have both parties sign off on it—should you need to go to court in the future, this sort of documentation is crucial. Take notes on the call so that you can reference them in the event that the agreed upon actions were not taken and you need to call back.

Consider the Face-to-Face

This tip may be a bit uncomfortable, especially if you even have a hard time sending an email or making a phone call about a late payment, but it can be one of the most effective ways to resolve the issue. It is easy to ignore emails and phone calls, but it is much harder to brush off a vendor who is standing right in front of you. Again, you do not have to be aggressive and pushy—it is okay to be friendly, but you must also be firm. If you do not want to do it on your own, you might also consider hiring couriers to collect the payments.

Other Options

If in-house efforts are not getting results, you have a few options. If the invoice is less than 5,000 dollars, you can pursue the money in small claims court. Larger invoices will require you to go to civil court, where you will need the assistance of an attorney; if the debtor does not dispute the claim, you may have a judgment in just a few weeks, but if it is disputed, it can take much longer. Financial woes in recent years have increased the number of businesses pursuing debts in court, and you may have to wait awhile for a resolution. You can also work with a collection agency—some take a percentage of the invoice while others offer flat-fee services where you pre-pay for a number of collection efforts and you get to keep 100 percent of the money. There are also attorneys that handle collections for a fee.

Getting Cash When You Need It

If your cash flow issues are really putting a crimp in your business, you have options to receive immediate cash flow. Merchant cash advances work by fronting you money and you repay the loan by automatically sending the company a portion of your daily sales. An accounts receivable financing company can be a good option as well—in this scenario, the company purchases your invoices, gives you a large percentage up front, collects payment from your customer directly and you receive the rest minus the service fee.

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