Finding, getting, and keeping customers is the challenge every business faces. Very few are lucky enough to have new prospects lining up at the door. However, how can you be sure that the customer, after all your hard work, will pay? What can you do to get a client to pay an invoice—and pay on time?
Suffering a non-payment event—whether it’s your first, the most recent, or the most significant—can feel overwhelming. Damage to companies caused by non-payment of invoices is never solved overnight. Restoring optimism and trust is an ongoing challenge.
Non-payments can actually add up and damage your company on multiple fronts. Even ignoring a relatively-small invoice can hurt your bottom line—especially if you depend on receiving a payment in time to pay expenses or if you rely disproportionately on a small number of clients, AKA “concentration risk.”
So what do you do when a customer doesn’t pay?
Knowing where to start is essential.
How to Avoid Non-Payments from the Start
After a few years of trading with a given customer, you may feel that the relationship is great and you can trust your customer, so these problems will not affect you. You may believe that because the organization is large, it will pay your invoice to protect its reputation. Perhaps the account has assured you that a budget is in place and there is no danger of nonpayment. Your sales team may have checked the credit history of the customer elsewhere and feels confident that the customer is financially robust. These indicators are all important, of course, but don’t be surprised if payment delays still occur.
In order to avoid non-payment from the start, it helps to understand a little more about how the event occurred in the first place. Begin by asking yourself the following questions:
- Did you have systems in place to prevent loss or limit your exposure?
- Did you get contracts signed?
- Did you outline your deliverables and payment terms?
You can make non-payment less likely to happen by answering these questions and being proactive. You can then begin to mitigate your A/R risk by following cash flow best practices. Learn more.
Getting a Client to Pay an Invoice after Nonpayment
It’s difficult when a customer misses a payment—especially when it’s one you have grown to trust. How can you convince them to make a payment? Start with these four steps below, and remember that nurturing the relationship with your customer is of the utmost importance. Fostering open communication with your customers can save you from hefty legal fees and court dates in the end.
1. Contact the customer
The first step is to make contact with the customer. Sometimes a phone call or resending the invoice is enough to secure payment. If this doesn’t work, explain the consequences of nonpayment for your particular business courteously—whether it’s discontinuing their service or reporting their delinquency to a credit-rating organization. Depending on the situation, you could also consider offering to accept the payment in installments to ensure that you can collect the debt and increase cash flow in the short term.
2. Assess interest or late fees on unpaid invoices
Because you extend credit to customers, you can charge late fees or interest when invoices go unpaid. But charging a late fee or interest can’t be added on without notice. It’s always best to have a late-fee policy in place and as part of the original agreement of sale. Include a reminder about the policy on every invoice. Doing so can be a good incentive to customers to pay you on time.
Once an invoice becomes past due, contact the customer by letter reiterating your late-fee or interest policy and provide a copy of the past-due invoice. In that letter, you may opt to offer a payment plan and the parameters around that in lieu of charging the fee. Those parameters should include the specific number of payments, amount of each payment and the payment schedule. In addition, with a payment plan in place for past-due money owed, it is wise to make all other sales to that client cash on delivery until the payment plan is completed and past-due monies are paid.
Cash flow problems can happen in any business. Be careful when – or if – you charge a late fee. If a good customer suddenly is unable to pay an invoice, it’s worthwhile to try to understand their position, collect what is owed via an agreed-upon payment plan and maintain a good relationship. Remember that in some instances, applying a late fee or interest the moment an invoice is past due can cause harm to the relationship and not only result in non-payment but also a lost customer.
3. Send a formal debt collection letter
There may be times when calling to remind a client about a past-due invoice or offering a payment plan in lieu of accruing interest or late fees gets no response. In those instances, it will be time to craft and send a formal debt collection letter.
The purpose of a debt collection letter is two-fold: You want to collect money owed to you and you want to establish evidence that you used good protocol to contact the client about the past-due amount in the event you decide to take legal action. Always send debt collection letters by certified mail with return receipt. This will allow you to prove your letters were received.
Your first debt collection letter should include the details about the invoice and summarize your previous attempts to communicate with the client. This letter should also inform your client that the unpaid invoice will be referred to a collection agency after a specific date. If that letter receives no response within two weeks, you should send a final debt collection letter. It should summarize your previous attempts to communicate with the client and inform them that the debt will be referred to a collection agency or that legal action will be taken to repossess unpaid property.
4. Call a collection agency
Good: If you do not find success contacting the customer, you may consider calling a collection agency. This helps free up your staff’s time for other work and delegate responsibility to the agency. This may be the best solution for small payments, as you often won’t have to put up any money—the collection agency will just take a part of the recovered sum. For larger delinquent payments, filing a lawsuit may be warranted. Talk to your attorney about how to proceed in your state; you may not need representation for the proceedings, but it is a good idea to get legal advice before following a suit.
Better: Rather than hiring a debt collection agency, you may wish to consider trade credit insurance at this stage. This insurance solution provides protection against unpaid invoices. Additionally, when you protect your accounts receivable against loss with a new credit insurance policy with Allianz Trade, you can also place unlimited debt collection accounts, including those pre-dating your policy, at our standard customer rate of 15%. By leveraging the preferred collections rate with Allianz Trade, many of our customers collect their debt and gain future bad debt protection for the same amount or less than a traditional debt collection agency.
5. Take legal action for nonpayment of invoices
If working with collections did not work, and unpaid invoices are still lingering, it is time to seek legal action. You have the choice between small claims court or civil court. Small claims court is less time, money, and is quick to resolve your issue within the same day. With civil court, you will need to hire a lawyer, and the case typically spans over a series of days—ultimately racking up in legal and court fees. Before deciding which venue to pursue, you should pursue legal advice.
6. Pay attention to your staff
In severe nonpayment events, your cash flow may be damaged, and employee morale may be impacted—especially if you have to introduce job cuts and other cost-saving measures to remain competitive. In these cases, it benefits you to foster open and honest two-way communication between employees and management about the situation: what is being done to resolve it and how it will be avoided moving forward. Maintain trust by making sure that payroll is satisfied and that employees have clear expectations about when they will receive their checks. If you have to get a bridge loan or pursue financing to ensure these payments, do so. If your employees stop trusting you, you could end up facing even bigger issues, like poor engagement, employee turnover, and loss of reputation.