How to handle overdue invoices

Have you had a payment deadline pass without any response from your customer? Figuring out what to do can be challenging, especially when you also want to maintain a good relationship with the customer. Here are some ways to handle overdue invoices.

Dealing with overdue invoices is important for your business, as late payments affect your company’s bottom line. However, it’s important to handle unpaid and overdue invoices in a way that maintains good customer relationships. 

What happens when a business has a lot of overdue invoices?

When your business has a lot of overdue invoices, your cash flow will be affected. Since you’re not. receiving the fund you are owed, you might need to put a hold on new projects and also find it challenging to products and services you need.

See also: 5 invoicing tips for beginners

When is an invoice overdue?

An invoice is considered overdue when the payment has not been received by the specified due date. The due date is typically included in the payment terms on the invoice.

For example, if an invoice is dated March 1st with net 30 payment terms, payment should be received by March 31st. If the payment is not received by this date, the invoice is considered overdue on April 1st.

How long can an invoice be overdue?

How long an invoice can be overdue varies and relies on your business’ policies, the terms agreed upon with the cusstomer, and legal regulations.

Generally, businesses can pursue overdue invoices for up to six years before the claim becomes invalid. After this six-year period, the customer is no longer legally obligated to pay the outstanding invoice.

5 ways to handle overdue invoices

Here are 5 things you can do if you have overdue invoices:

1. Payment reminders

The first thing you can do is to send a payment reminders. Some customers may not realize that due date is comng up and simply forget to pay. This is often the case with overdue invoices.

You can send the payment reminder by email and remind the customers that their payment is due. You should include the amount that they have to pay, the payment terms and any late payment fees. You can send multiple reminders to highlight the importance of paying, but make sure to wait a little while between each reminder. It’s also a good idea to attach a copy of the original invoice for reference.

Here is an example of reminder email:

2. Make a phone call

You might not get a response to the payment reminders you send. It’s a good idea to call the customers to see if there are any problems with the payment. This also allows you to discuss a solution with them.

Remember that it’s important to stay polite and professional in the phone call, and don’t accuse the customer of paying late on purpose. You want to keep a good working relationship with your customers, otherwise they’re less likely to purchase from you in future.

3. Take legal action

If you have overdue invoices for a significant amount of money, you could take legal action. Gather all the documents, the invoice, payment reminders, other written communication between you and the customer, and seek counsel help from a professional. Taking legal action not only increases the possibility of getting paid, but it also shows that your business operates professionally.  If the overdue payment isn’t a large sum of money, businesses often write the invoice off as bad debt.

4. Charge a late fee

A late fee is an additional charge for a delayed payment. You can only charge a late fee if you’ve clearly communicated your late fee policy to the customer and they’ve agreed to it in writing. The invoice you’re sending should also state the late fee policy clearly. You can charge a flat fee for late payments or a percentage of the total amount.

5. Extend credit

There could be various reasons that a customer is late in paying you. When you’ve talked to the customer, you should consider extending the deadline or setting up a payment plan.

For example, instead of requiring an immediate $8000 payment, you could allow the customer to pay $8000 in monthly installments over ten months. However, keep in mind that letting the customer pay you in instalments can negatively impact your cash flow.

Alternatively, you could accept a partial payment of $6000 upfront and arrange a payment plan for the remaining $2000.

How to avoid overdue invoices

Timely payments are important to maintain a healthy cash flow and ensure the financial stability of your business. Overdue invoices can disrupt your operations and strain your relationships with customers. To minimize the risk of overdue invoices, here are some effective strategies:

Be clear about how the customer should pay you

To avoid overdue invoices, you should establish a clear payment agreement with your customers. Make sure to outline all payment terms and conditions, so that both parties understand their responsibilities.

Here are some things to include:

• Payment terms: Clearly state the payment due date. Example could be «Net 30 days from invoice date». You should also specify if there are any early payment discounts or late payment penalties. 
• Payment methods: List the acceptable payment methods, like bank transfer, credit card, or PayPal. Provide necessary instructions for how to pay via each payment method.
• Late fees and penalties: Clearly outline any late fees or penalties for overdue payments. 
• Documentation: Make sure that both parties sign the agreement to acknowledge and accept the terms. Get a copy of the signed agreement, and give one to the customer as well.

See also: How to make an invoice

Use an invoicing software

Using an invoicing software can reduce the chances of overdue invoices by streamlining the whole invoicing process. With an invoicing software, you can create and send invoices according to your schedule, ensuring timely delivery to your customers. Invoice software also help you ensure that you’re including everything you should on the invoice, and also provides professional-looking templates. Lastly, invoice software helps with record-keeping, as the system stores all your past invoices.

Conta is a free invoicing software for all businesses, no matter the size or industry. We are trusted by over 60 000 businesses worldwide, and rated 4,5 on Google. You can create an invoice in just a few minutes!

Sign up for free

Customer relationship 

Building and maintaining strong customer relationships is the key to timely payments. Make sure to have clear communication from the get-go. Your clients should understand the payment terms, due dates and payment method. Check in with your customers regularly to see if they are satisfied with your services and address any issues promptly. 

To avoid overdue invoices, you should provide high-quality services to build trust and loyalty. Satisfied customers are more likely to prioritize paying your invoices. Another tip is to send thank-you notes or follow-up emails after a project is completed to show your appreciation.

See also: Creating an invoice for freelance work: A complete guide

Advance payments

Requesting advance payments is an effective strategy to secure good cash flow and reduce the risk of overdue invoices. By collecting a portion of the payment upfront, you can ensure that you have the necessary funds to start projects and cover initial costs.

Typically, an advance payment ranges from 20-50 percent of the total project cost, depending on the nature and scope of the work. You should figure out a percentage that covers your initial expenses and mitigates financial risk. For longer-term projects, consider setting milestones and requiring partial payments as each milestone is completed.

Offer several payment options

Providing different payment options can help ensure timely payments and reduce the likelihood of overdue invoices. By making the payment process as convenient as possible for your customers, you increase the chances of them paying on time. Here are some ways to implement different payment options:

• Accept major credit and debit cards: This is one of the most common and convenient payment methods. Use a secure payment gateway to process card payments efficiently and safely.
• Online payment platforms: Offer payment options through platforms like PayPal, Stripe, or Square. These platforms provide a quick and easy way for clients to pay you. Integrate these payment options directly into your invoices to make it a seamless process.
• Bank transfers and direct deposits: Allow clients to make payments via bank transfer or direct deposit. Provide clear instructions, including your bank account details, IBAN, and SWIFT/BIC codes if necessary. Make sure to confirm the payment as soon as you receive it, to reassure clients.

Managing overdue invoices is important to sustain the financial health of your business. By implementing clear payment agreements, utilizing invoicing software, fostering strong customer relationships, requesting advance payments, and offering several payment options, you can significantly reduce the chances of overdue invoices. Furthermore, these strategies not only ensure timely payments but also help maintain a positive relationship with your customers, promoting long-term business success.