What does it mean to be past due on an invoice?

Late payments from customers can put your business into real difficulty. According to the Federation of Small Businesses (FSB), around 30% of invoices are paid after their due date. This leads to difficulties which can mean the difference between solvency and bankruptcy. The FSB estimates that 50,000 small businesses in the UK fail every year due to late invoice payments.

Monitoring payment deadlines and enforcing payment terms is key to ensuring that invoices are paid on time.

Any invoice which has not been paid by the due date becomes known as a “past due” invoice.

Different payment dates can be negotiated for different clients. Although a company may apply a “standard” due date, such as 30 days after the date of invoice, more flexible payment terms and a payment plan are often negotiated. Lengthier payment terms may be agreed with regular customers.

The European Late Payment Directive, which was adopted in 2011 and is currently being revised, strives to protect businesses, particularly small ones, from the devastating impact of late payments. According to the Directive, enterprises must pay their invoices within 60 days, unless an alternative payment date has been expressly agreed. Beyond this point, interest for overdue payment and a €40 minimum compensation charge are applicable.

There are a number of reasons why an invoice may become “past due.” In many cases, it may come down to poor business practices, with administrative oversights leading the customer to fail to note that the payment date has passed. In such cases, the payment can often be recovered with a simple email or phone call reminding them that the due date has expired, and payment is now overdue.

However, in other situations, the late payment may be an indicator of the customer facing financial constraints. A minor hiccup in cash flow could delay a payment by a few days or weeks, but deeper financial difficulties could also be at the source of the past due invoice. 

Finally, disputes between the two parties to the transaction could also result in defaulted payments. If there are unresolved issues around the quantity or quality of the product, for example, the customer may be unwilling to settle the invoice within the agreed timescale.

The terms “outstanding invoice” and “past due invoice” are often (and wrongly!) used interchangeably. It is important to be aware of the difference between the two.

When an invoice is issued to a customer, it is referred to as an “outstanding invoice” until it is settled. However, as well as indicating the amount due, the invoice also contains information on when the payment is due. Most companies will have a standard timescale when payment is due, for example, within 30 days of the invoice date.

All invoices which are issued are, therefore, outstanding until they are paid and only when they exceed their due date do they become “past due.” All past due invoices are outstanding, but not all outstanding invoices are necessarily past due!

Invoices can become past due for any number of reasons and how a business handles them can make the difference between sinking and swimming.

There are several actions which businesses can take to ensure that past due invoices have as minor impact as possible on operations.

Communication is key to resolving past due payment issues. Proactively contacting the customer to politely remind them of the past due date should be the first step. This payment reminder can be done within the first few days of the invoice date through a payment reminder email. The email should mention the invoice number and amount, noting that their due date has passed, and that payment is due immediately. It is best to send this reminder email right after you have confirmed that there are no issues with the original invoice and billing process. Often, if the late payment is due to an administrative oversight, this will payment reminder be all it takes to resolve the problem.

Another more strongly worded reminder may be needed if this first step does not have the desired effect. This past due invoice email communication should broach the subject of difficulties the customer may be facing and may propose a discussion to come up with alternative payment options for the outstanding payment. Instead of an immediate payment, would an extension to the payment due date by a certain number of days or weeks resolve the problem? Would payment in instalments be more manageable for the customer and make full payment more likely in the longer term? These negotiations need to be tailored to the customer on a case-by-case basis. Telephone may be the best way to engage in this type of discussion, although any agreement reached should of course be made in writing.

If contact by email and phone fails to resolve the difficult, a formal overdue invoice letter should be sent to the defaulting party, clearly stating the past due date, and setting out the steps that will be taken to recover the debt if it is not settled immediately. This may include mention of any penalties or late fees which were included in the agreed payment terms but may go as far as instigating debt collection procedures or taking other legal action to recover the amount.

There are several strategies businesses can take to minimise the risk of past due invoices. First among these is to ensure that payment terms are clear and unambiguous.

It is also essential to have a comprehensive invoice management system in place. Invoicing software can effortlessly track invoice dates, issue alerts when payments are due and even automate reminders. This can help flag up any potential issues and ensure that procedures are initiated to resolve the issue sooner rather than later.

For neglectful clients consider sending an advance payment reminder email around a week, or a few days before the actual due date to let them when an invoice is due.

Late payment fees can be used as an overdue payment prevention strategy and encourage advance payment and are always discussed prior to raising an invoice. Before discussing any late payment fees do thorough research on how much you are legally allowed to charge, depending on your country or jurisdiction.

To prevent cash transfer delays, offer your customers a variety of payment methods such as cash, check, credit card, ACH transfers, etc. when setting the payment terms.

Although overdue payments can rarely be avoided entirely, conducting comprehensive credit checks on customers prior to the transaction is one way of minimizing this risk. Payment terms should be adjusted and agreed depending on these credit checks.

When all attempts to resolve the issue have failed, final notice should be given, indicating that recovery of the debt is being handed to the relevant authorities like a small claims court or a collection services company.

The European Late Payment Directive entitles the creditor to apply overdue payment fees and interest if an invoice remains unpaid for more than 60 days. 

If this fails, you may wish to consider pursuing the debt through legal actions or by engaging the services of a debt collection agency. Both options are likely to be costly in terms of time and money, however, and it is important to evaluate the potential benefit of proceeding.

Timely payments and maintaining a healthy cash flow are the cornerstones of good business. Dealing with past due payments is time-consuming and stressful and good credit and invoice management procedures should be in place to minimise the risk of overdue payment and to manage past due invoices as soon as they arise.

Investing in financial management advice, software and training can help avoid and mitigate the impact of late payments, freeing you up to focus on your core business.