How To Deal with Overdue Invoices As A Small Business

by | Jul 20, 2021

Many businesses face dealing with overdue invoices. However, for small businesses and start-ups, late payments can be detrimental. When you’re in your first couple of years of business or are a small operation, profit margins are often narrow. You may even be relying on your business profits for your basic salary.

Some business owners have huge dreams of building empires and becoming global success stories. Others are seeking a better work-life balance and pursuing their passions. They aren’t always focused on making huge amounts of money or scaling up. Some small business owners just want to make a reasonable living doing what they love. Whether you are the former or the latter, you’ll need to keep your income and outgoings in careful balance, because getting behind as a small business can quickly cause cashflow problems. Therefore, it is very important to know how to deal with late paying clients and overdue invoices, as a small business owner.

When Is An Invoice Overdue?

UK guidelines stipulate that invoice payments should be made within 30 days unless otherwise stated on the invoice. However, you can set shorter invoice due dates which are common with smaller businesses. The standardised 30-day payment for invoices was prevalent when cheques were used in business accounting and before internet banking became so streamlined. Now that making payments is simpler and faster, many suppliers and freelancers are setting their invoice due dates for anything from 7-to 14 days, without issue.

What is most important is that you include an invoice date and a due date. You should also include your invoice payment terms in your terms and conditions before work is commenced. Therefore, if these terms don’t meet with the client’s standard processes they can raise this, allowing you can agree on a solution before working together.

Reasons For Late Invoice Payments

There are a whole host of reasons why a client might be late paying invoices. These might include:

  • Bad organisation or lack of accounting personnel
  • Cashflow issues, meaning clients have to wait on their clients to pay them before settling your invoice
  • Their payments dates don’t correspond with your invoices. For example, you invoice on the first of the month and they make payments on the 30th of the month
  • Authorisation – large companies sometimes have processes in place to sign off payments and this can cause delays
  • Your invoicing is incorrect
  • The client ‘forgot’
  • The invoice is being disputed

The key is finding out the cause of late invoice payments, so you may have the opportunity to resolve this. If, for example, your invoice has incorrect information or payment details are missing, you should be able to amend this swiftly and reissue the invoice.

In the case that the client has set dates to make payments or that it takes them longer due to their processes, you need to ask yourself if you can work with their system. A common fix is to invoice earlier so that your payment date meets with their payroll date. For regular clients, you may be able to adjust your expectations so long as a date can be agreed upon when payment will be made each month. Then, even if this is later than you would prefer, at least you know that payment will be made on this date. Asking a client to adjust their accounting system to suit you can be high risk and it may be easier for the client to replace you with a more flexible supplier or freelancer. So, if you can accommodate their process this is recommended unless it affects you paying your staff or suppliers on time.

If a client regularly makes late invoice payments because they have cash flow issues, then this could be a red flag. Ask yourself what it will cost you if the client cannot pay you. Can your business survive it? If not, it may be time to consider if the client is worth the risk to your business. Rather than cut them loose, perhaps you may consider requesting upfront payment or a deposit? This mitigates the risk to you and your company’s finances. Keep reading for more about Payment Terms.

Are Overdue Invoices Common?

Although late payments shouldn’t happen, they do occur more often than you’d think. As a new business owner, chasing clients for overdue invoices can feel uncomfortable and establishing processes for preventing late invoice payments can take time.

Unfortunately, some larger businesses may take advantage of smaller companies by not sticking to invoice due dates. The assumption is that new or smaller businesses do not have the power to push back. Yet, the reality is that the legal responsibilities are the same for all companies, regardless of size. Therefore, you have the same right to demand timely payment as any other business.

How To Handle Overdue Invoices

To answer this question, we’ve enlisted the help of contract and debt recovery specialist, Colin Ward of CW Contract Law and Legal.

Here is Colin’s expert advice on how to deal with overdue invoices and how to prevent late payments in the future.

Colin Ward

Payments are considered to be late 30 (or 60) days after either the customer receives the invoice; or 30 (or 60) days after the company has delivered the goods. Once a payment is late you may begin taking the following steps:

Dealing with overdue invoices

  1. Reminder Invoice
  2. A Telephone Call
  3. An Email
  4. A Letter
  5. Second Letter
  6. Debt Recovery

Step One – Reminder Invoice

The first thing to do if an invoice payment is late is to send your customer another invoice. The idea is to prompt and remind the client to pay. After 30/60 days have passed, you are legally allowed to charge interest on top of the original invoiced amount. However, you may wish to take steps 2 and 3 prior to doing this.

Step Two – A Telephone Call

Usually, an overdue invoice is a simple mistake or oversight. This can be addressed with a quick phone call to the client. Use the opportunity to discuss future business, if relevant, but don’t make the mention of the invoice an afterthought. Politely ask the client to follow up on your invoice, stressing that the payment is now overdue.

Step Three – An Email

If your invoice has still not been settled within a week of the phone call (5 working days), you need to start creating a paperchain. This begins with an email. Again, be polite and state the number of days the invoice is now overdue. Attach a copy of the invoice so action can be taken as soon as possible and refer also to your terms and conditions. Here, the client should have agreed to payment terms prior to work commencing.

Step Four – A Letter

Following an email, the next stage would be a letter. A printed letter stipulating that payment is required. You may also include interest for late payment or else state your intention to charge interest if payment isn’t settled by the requested date.

Step Five – 2nd Letter

In the case that payment has still not been made, then a second letter is necessary. This one should be firm and include the recourse to debt recovery if payment is not made immediately.

Step Six – Debt Recovery

Initiating a debt recovery service will be needed at this point, regardless of excuses the client may be giving regarding why payment is late, but especially if they are no longer communicating with you. You may wish to send a final email to let the client know that you are instructing a debt recovery specialist. Only because, if you don’t normally converse through letters, you may wish to check these have been received and read.

A Debt Recovery specialist will be able to handle your claim going forward so that you can return to running your business.

CW Contract Law and Legal have a Debt Recovery service, ready to purchase. Or get in touch with them for a free analysis of the debt and the chances of recovery prior to instruction.

Prevent Late Payments And Overdue Invoices

The best course of action is always prevention. It’s important, as a small business owner, to consider how to prevent late invoice payments from clients. Starting a business is a rollercoaster and many new business owners find dealing with the financials intimidating. This can sometimes come through in communications, in how prices are set, and in reluctance to put proper contracts in place. We want to get the client relationship right and formality can feel awkward. However, the client-supplier, or client-freelancer relationship, is a business one and it can be friendly and collaborative whilst following proper practices. Business contracts help secure the relationship and set expectations that enable us to proceed with faith. That being, here are a few steps you can take to help prevent late invoice payments and similar difficulties from arising:

Terms and Conditions

Your terms and conditions should lay out what the terms for your services are. This might include processes and timelines as well as intellectual property rights and what would happen if a dispute arises. Your terms and conditions help protect you from late payments so long as this is covered in the contract. Include when invoices will be issued and how long clients then have to make payment. Once your client has agreed to your terms and conditions they will be breaking this contract if they do not issue invoice payments on time. So long, of course, as you have adhered to your responsibilities also.

Payment Terms For Small Businesses

Setting payment terms effectively means balancing your needs with reasonable business practice. As a small business, you must be honest with yourself about when you need to receive payment by. For some businesses, this will be before products are shipped. Others, particularly service providers, may be able to receive payment up to 30 days after service is completed. For project-based services, a deposit is often required which should cover the majority of outgoings you’re undertaking to complete the project.

Deposits and upfront payments are not uncommon in business and are established to maintain your cash flow management. Receiving a deposit or upfront payment should mean you can cover the cost of materials and staffing required for the client order or project. Not being able to pay employee wages or settle invoices for goods, because a client has not yet paid you, will damage your reputation as well as your balance book. You have a moral obligation to structure your payment terms in a way that protects your employees and suppliers, as well as your business.

Partial or complete upfront payment is something that small businesses may want to consider. After all, this is becoming commonplace. Upfront payment is expected for most goods we purchase, for subscriptions, memberships, travel and most daily expenses.

However, it is important to understand your clients’ operations to devise payment terms that are fair and achievable for both parties.

To avoid overdue invoices, small businesses should:

  • Standardise payment terms, but consider being flexible for a client who makes a reasonable request
  • Include payment terms in terms and conditions and ensure clients agree to these before commencing work
  • Calculate if the company would survive non-payment or up to 6 months of pursuing payment. If not, strongly consider requesting upfront payment or a deposit

Communication

It is ok to be casual in some aspects of your client communications. However, you must not lose sight that it is a business relationship. This means that when it comes to setting project deadlines and delivery expectations, your communication should be clear and professional. This should also be the case when issuing invoices. Your need to be paid for your products or services is not a casual one and the tone of communication should reflect this. It is possible to be both friendly and intentional.

Accurate Invoicing

Your accounting should be beyond reproach if you expect your clients to pay promptly and correctly. Invoices that fail to contain a payment due date, terms of payment, payment/banking details or the correct addressee details will need to be corrected and reissued. This may cause unnecessary delays.

Standardise and consider automating your invoicing. There are plenty of simple, affordable invoicing solutions that can make accounting easier. Services may even be included as part of your website hosting platform or other software your company is utilising.

Keeping to an accounting schedule can also help to ensure you’re making time to check invoices before they are sent and have regular set dates to check on and, if necessary, follow up on payments. For small businesses that don’t have an accounting department or designated finance administrator, having a set time every week for accounting is wise. Make it the first thing you do on Mondays or mark an hour or two out in your diary every Wednesday afternoon. Just make it part of a routine so that you do not let overdue payments go unnoticed or underestimated. The process for overdue invoices should be actioned as soon as is reasonable.

Or you can instruct a legal professional…

Are you struggling with overdue invoices from late paying clients? Get in touch with a debt recovery advisor who can help you with your next steps and take on the burden of chasing clients on your behalf.

If you would like a legal professional to check over your payment terms to ensure they protect you from late paying clients, then please search our legal services platform to find the right lawyer for your small business requirements.