How to handle clients not paying invoices
For business owners, staying cashflow positive is always a top priority.
On top of generating conversions and increasing sales, maintaining positive cashflow also means collecting the funds owed to you on time and as expected.
Unfortunately, this doesn’t always happen.
Late payments can bring your cashflow to a halt, leading to financial problems for your business.
That said, we’re going to discuss what to do when a client doesn’t pay their invoice — and how you can maximise the chances of getting paid on time in the future.
This is the basics of debtor management.
Common reasons why clients don't pay invoices
Again, there are a number of potential reasons for a client to miss a payment or invoice deadline.
And it’s crucial that you understand the reason behind each late payment instance you encounter. For one, knowing why a customer was late will allow you to take the optimal approach when attempting to recoup the funds earned. It'll also allow you to put safeguards in place to avoid similar issues in the future.
Now, let’s take a quick look at the three main reasons a client may fail to pay their invoice.
The client is experiencing financial hardship or uncertainty
As mentioned above, financial challenges on the client’s end can often cause them to be late with their expected payments.
Obviously, the customer isn’t going to pay up if they literally don’t have the money to do so.
But, a report from Tally Street suggests that even financial uncertainty can cause clients to neglect their open invoices for the time being.
In other words, if even the possibility of future financial hardship rears its ugly head, clients may become increasingly hesitant to pay their invoice in full.
As we’ll discuss, you’ll likely need to work with such clients to figure out a way for them to repay you without placing too much of a financial burden on their organisation.
The client is dissatisfied with product or service
If your product or service doesn’t live up to your client’s expectations, they’re probably not going to feel compelled to pay you.
Even if you feel that you’ve held up your end of the bargain, the potential for a dispute to occur is ever present.
(And, unfortunately, there'll always be those who'll raise disputes regardless of the quality of your work.)
In dealing with singular disputes, the task ahead will be to prove that you’d provided exactly what you’d promised the client — and that they need be held responsible for payment in full.
Thinking of the “big picture”, you’ll want to keep track of all disputes made — and make improvements to your operations as needed.
The client didn't receive the invoice
Sometimes, the issue may be of a more logistical nature.
And either party may be at fault.
On your end, failure to deliver an invoice as planned makes it impossible for your client to pay you. Even if they’re aware of the due date, they’ll have little reason to pay up if you never send them a bill.
On the client’s end, operational friction and other obstacles may lead to late payments on open invoices. While you don’t have complete control, here, there are a few things you can do to help your clients out in this regard — which we’ll come back to in a bit.
How to reduce the number of clients not paying their invoice
Obviously, having delinquent clients isn’t good for your business.
Not only do these customers put a halt to your cashflow, but chasing them down can lead to a tonne of wasted time, money and energy.
In fact, many companies spend as much as one day per week chasing overdue invoices. This adds up to two weeks per year — time that could be better spent improving and growing as a business.
So, while it’s impossible to eliminate late payments altogether, you should certainly try to minimise the issue as best you can.
Here’s how.
Set clear payment and contractual terms
When it comes to business agreements, there should be no question as to what each party is responsible for, and when they need to provide it.
On your end, this means defining in clear detail what products or services you’ll be delivering. This is especially important for service-based companies who provide value that’s often a bit more intangible in nature.
On your customer’s end, your contracts should include detailed information regarding the cost of their purchase, the deadline for repayment, and any potential penalties they may incur for missing this due date.
This serves a number of purposes:
it gives your customers ample time to prepare their finances
it provides them the opportunity to contact you ahead of time should making an on-time payment become an issue
it offers legal recourse to your organisation should you need to escalate the issue.
Send invoices immediately
As we said earlier, your clients can’t pay you until they’ve received an invoice from your company.
Once they do, though, they’re free to pay whenever is best for them – up until the deadline, of course.
Ideally, they’ll want to get the invoice off their plate ASAP and will remit payment soon after they receive a bill for your services. In these cases, sending the invoice immediately means you get paid much earlier than you may have anticipated.
Sending an invoice immediately also leaves a longer “grace period”, in which technical glitches and such can be hammered out ahead of the payment deadline. Conversely, waiting too long to send an invoice will mean less time at hand to deal with any issues that arise.
And, again, sending invoices immediately can add some “oomph” to any legal claims you may need to make in the future. If the court sees that you gave the client ample opportunity to make a payment or refute a claim — and they still failed to do so — it'll likely paint your organisation in a pretty good light.
Incentivise early payments
Even if your clients can pay their invoices early, they might not have much reason to actually do it.
That is unless you give them one.
When working out a contract, you might choose to include incentives for those who choose to pay early. Typically, this incentive will come in the form of a discount — either on the client’s current purchase or a future one.
You could also taper your discount offers, providing larger incentives to your earliest-paying customers.
While these incentives will put a small dent in your profit margin, avoiding the costs associated with chasing down late payments is well worth it. Moreover, the incentives you provide will give your early-paying clients yet another reason to continue doing business with your company in the future.
Use simple accounting software
Streamlining and automating your invoicing processes is crucial to your efforts to get paid on time.
Which is why accounting software has become an essential part of modern business tech.
The right accounting software will make it easy to:
track invoice deliveries and opens
offer convenient payment options to your clients
send payment reminders before and after due dates.
In turn, you’ll not only have a better chance of getting paid on time but will also be better equipped to handle any payment-related issues that come about.
Options for business owners when a client refuses to pay
Whether a client is unable to pay or they simply refuse to do so, Australian small businesses have a number of options as to how to proceed.
Before diving in, a couple of things to note:
First, the following steps present a typical pathway for escalating individual claims of non-payment from a debtor. In more blatant cases (such as when a client ceases communication altogether), skipping ahead to more drastic measures may be the more effective course of action.
Secondly, businesses operating in specific industries may have additional options during certain stages of escalation. We’ll be sure to point out when this is the case, to ensure you stay on the right path to reconciliation.
Send payment reminders
If a client misses an initial payment, your first order of business will be to send them a friendly, yet professional, reminder note.
This reminder should include any information involved in the transaction in question, such as:
the amount owed
the payment deadline
contractual language regarding late payment policies and the like.
Again, this first notification should be a bit more friendly and understanding in nature. In most cases, you’ll want to give your client the benefit of the doubt, and operate under the assumption that this quick reminder will be all they need to send over their payment in full.
You might even wish to allow your clients to repay their balance in instalments if needed. If you’re in the financial situation to offer this option, it can be an effective way to differentiate your brand and increase the loyalty of your customer base.
When sending these reminders, be sure to use the optimal channel for each client. This will all but ensure they receive the reminder as planned — which will ideally lead them to quickly pay back the money owed to your company.
Send a Letter of Demand
For clients that remain delinquent and/or ignore your informal payment reminder, you’ll need to take a more serious approach.
This first step for escalation involves sending the client a letter of demand. Essentially, this document explains that you may be forced to take legal action should the customer fail to repay the amount due.
A letter of demand should be more formal in nature and should include thorough and accurate information regarding your agreement with the client. You may also include any additional documents (for example, invoices, payment reminders and other correspondences) as proof of what you’ve done to help rectify the situation.
Though a letter of demand isn't a notification of legal action in itself, it may eventually come into play should a case be escalated to the courts. That said, you may want to have an attorney look over the letter before you send it — or even have them draft the letter in the first place.
Explore mediation
In some cases, a client might dispute the terms of your invoice altogether.
These disputes can take any number of forms:
disputes regarding their contractual obligations
disputes over the quality of service rendered
disputes over the customer’s level of satisfaction with the value provided.
Or, a customer may be willing to pay, but may end up needing to renegotiate their payment plan due to financial troubles.
When such disputes arise — and aren’t easily hashed out between both parties — mediation should be your next step.
Mediation services exist for businesses of all sizes, in a variety of industries. Through these services, an accredited mediator will work with your team and your client to settle the dispute in a way that satisfies both parties.
But mediation isn’t always your best option at this stage of the process. In cases where the client shows little to no sign of wanting to cooperate (or even communicate), you might not want to even waste your time here — and simply skip ahead to the next step.
Hire a debt collection agency
If your efforts to recoup payment have been futile up to this point, you have one final option at your disposal before you take legal action.
Debt collection agencies, as the name suggests, operate on your behalf to track down delinquent clients and retrieve funds equal to the amount owed. Once they’ve collected from the client, the agency will deliver it to you — minus a standard fee, usually of around 30%.
(Some debt collection agencies will actually buy out your unpaid invoices upfront — often at a much lower price — and will take over the collection process entirely moving forward.)
To be sure, the price tag isn’t exactly negligible.
But, it may be just as costly to chase after your delinquent customers on your own. What’s more, a reputable agency has a much higher chance of recouping the money owed — potentially making it a more worthwhile investment for your business.
File a complaint with an industry commission
In many industries, there exists a commission, ombudsman or other representative body that can provide guidance to businesses looking to reclaim unpaid invoices.
Here’s a sample list of industries this applies to, along with the names and websites of the commission to contact:
Airlines: Airline Customer Advocate
Banking and insurance: Australian Financial Complaints Authority
Energy: Australian Energy Regulator
Franchising: Australian Small Business and Family Enterprise Ombudsman
Telecoms: Telecommunications Industry Ombudsman
These organisations can provide more specific information and advice to individual companies on a case-by-case basis. However, they don’t necessarily act in any official capacity — but will point your team in the right direction should a legal complaint be your next step.
Lodge a claim with the Small Claims Tribunal
Australian businesses looking to take legal action against their late-paying customers can start by lodging a claim with their local, state, or territory Small Claims Tribunal.
(Typically, claims of less than $100,000 are handled by local courts, with state or district courts handling larger claims.)
Though filing a legal claim can potentially be a time and resource-consuming process, it can also lead to the best possible outcome for your business. In cases where the customer is deemed at fault, the court may require them to pay additional fees to compensate your organisation for your troubles.
To achieve this outcome, you’ll need to be able to prove beyond doubt that you’ve fulfilled your end of your contract. It'll also help your case to show how much leeway you’ve given your delinquent client up until this point.
Due to the sensitive nature of making such legal claims, it’s critical that you contact your attorney before you even begin the process. From there, they can take the reins — and will contact you as needed to keep everything on the up and up.
Get more invoices paid on time
Getting paid on time is key to helping your business survive — let alone allowing it to thrive.
But, if you’re constantly struggling to get your customers to pay on time, your company is already headed for financial jeopardy. Even if sales look great on paper, a lack of cashflow can cause operations to grind to an immediate halt.
MYOB’s accounting software helps you streamline your invoicing processes — allowing you to get paid on time without having to chase down your clients.
Ready to get started? Try MYOB FREE for 30 days and start solving your cashflow woes today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.