The Best Way to Collect Unpaid Invoices

Collecting unpaid invoices is probably one of the most tedious tasks of running a business. Most small and midsize companies handle collections somewhat reluctantly. Everyone hates to do it. Therefore, it’s a task that is done after everything else is done, or if you need money urgently.

This mistake is costly.

Collections should be seen as the one of the most important functions in your business – second only to client service. Spending time collecting your unpaid invoices brings in the money that your business needs to pay employees, suppliers, and all of its expenses. Without good collections, unpaid invoices would pile up and you would go out of business. It’s that simple.

Fortunately, collections doesn’t have to be hard or tedious. It’s a matter of following the right system. We are going to share a collections system that is easy to implement, simple, efficient, and incredibly effective.

From this article, you will learn how to:

  1. Avoid bad-paying clients
  2. Do collections calls the right way
  3. Use a simple trick to reduce the number of disputes
  4. Improve cash flow
  5. Use financing to improve your cash flow

How to get paid on time

In summary, the best way to get paid on time is to work with clients who have a track record of always paying on time. Add a good follow-up system, and you have a recipe for efficient collections with minimal hassles.

What happens if a potential client does not have a good payment track record? You can work with them as long as they pay in advance or upon delivery. However, you should not give them net-30 days credit. Otherwise, you will see those invoices quickly turn into bad debt.

Step #1: Check your client’s payment history

Before providing any client with net-30 payment terms, check their commercial credit. These reports provide you with important information about your client’s payment history with their other vendors.

If a client has a good track record paying their vendors, there is a good chance that they will pay you on time as well. Therefore, you can feel comfortable giving them a certain amount of credit.

Commercial credit reports are relatively inexpensive and can be bought from companies such as Ansonia, Dun & Bradstreet, and Experian. These reports are easy to understand and often provide a suggested credit line.

You can save your company a lot of hassles, minimize bad debts, and improve cash flow by simply checking the credit of all clients that request terms.

Step #2: Use a well-written contract

Every sale that you make should be governed by a contract. It should be crafted by an attorney and should outline all deliverables, time frames, how disputes are handled, and all payment expectations.

Not using a contract is usually a serious mistake, especially if you are offering payment terms. You will have nothing in writing that outlines when payment is due. And you will have little recourse if you need to take legal action.

Step #3: Use a delivery acceptance letter

One of the most effective ways to improve your collections process is to use an acceptance letter – a simple letter that states the work that has been done or products that have been delivered to the client’s satisfaction. It should be signed by the client once the work has been completed.

The acceptance letter helps you identify potential issues right at the time of delivery. If the client is unwilling to sign the letter, obviously there is a problem. This step gives you a chance to fix the problem immediately and minimizes the chances of having a dispute later on.

The acceptance letter also helps later with collections, as we will see in the next steps.

We suggest that you have an attorney draft a simple letter. However, don’t make it too onerous or your client may be unwilling to sign it. While this letter can help if you ever take legal action, its objective is to prevent collections problems from happening in the first place.

Step #4: Send the invoice and paperwork promptly

Send an invoice and any related paperwork as soon as the work is completed or product is delivered. Include the acceptance letter from Step #3, as it helps prove that you delivered according to the contract.

Follow the payment procedure outlined in the contract. If your client requires that you send the invoices to accounts payable, with a copy to the project manager (or someone else), do so. Not following the payment clause in your contract will cause payment delays, especially if you work with larger clients.

Step #5: Follow up with clients regularly

If you have followed these steps, most payments should arrive within your contract terms. However, it’s still a good idea to follow up with clients regularly. On the day that you send the invoice, verify that your client got it, along with all the paperwork.

Once the invoice is five days past due (i.e., on day 35 of a net-30 invoice), call or email the client to see if there are any issues. If there are no issues, try to secure a payment date. If that payment date is missed again, wait a few days and repeat this process. If the client misses multiple payment dates, you may have a collections problem.

Above all, always treat clients with courtesy and professionalism. Never break this rule, even if they are not paying you and are not behaving professionally. You will have better luck collecting slow-paying invoices by remaining professional.

Step #6: Handle disputes professionally

Sometimes a client does not pay an invoice because they have a dispute. There are genuine disputes, in which the client is unhappy with the quality of your product or service. If your client has a genuine dispute, do your best to solve the issue promptly. Do so even if they signed the delivery acceptance letter. This approach helps you keep the client.

However, some clients “manufacture” disputes in order to get additional work or products for free. Basically, there is no dispute, per se. The client is just holding your payment hostage to get some free work. Most credit checks will root out this type of client, but it still happens. In this case, send your client a copy of the signed acceptance letter. Usually, this tactic defuses the problem. It’s hard for them to argue that they are unhappy with your work if it meets their contract requirements and if you have a signed letter stating they accepted the work.

As in the previous step, always behave with courtesy and professionalism – even if the dispute is “manufactured.”

Step #7: Know when to use outside help

No collections method is 100% perfect. There is a small chance some clients will not pay their invoices. In this case, consider hiring an attorney or working with a collections agency. Dealing with past due and unpaid invoices and collections problems distracts you from running your business and can affect morale. It’s best to let professionals handle it.

Slow payments create cash flow problems

One of the problems of allowing clients to pay their invoices in 30 to 60 days is that it can lead to cash flow problems. These problems can happen even if your business is well run. If cash flow is tight, you can overextend yourself. Cash flow problems can also affect you if the company is growing very quickly. Basically, you find yourself with all your money tied to slow-paying invoices.

How to solve cash flow problems

One simple trick to improve your cash flow is to offer clients a discount for early payments. In most cases, you can offer your clients a 2% discount if they pay in ten days or less. Clients with available funds usually take the discount since it’s to their advantage.

Although early payment discounts can work well, they have a limitation. Early payments are voluntary and clients can choose not to make them. Therefore, you never know if a client will pay early or 30 to 60 days later.

A better way to improve your cash flow is to use financing. Unless you qualify for a business line of credit, the best alternatives for financing your business are invoice factoring, asset based lending, and inventory financing. These options can improve your cash flow and are available to small and midsize business.

Note that these options can be used only if:

  • Your clients have good commercial credit and pay in 30 to 60 days
  • Your greatest problem is that you can’t afford to wait up to 60 days for a payment

Financing should not be used if your clients are bad payers. Financing invoices from bad-paying clients can backfire and affect your cash flow.

Invoice factoring

Invoice factoring is a tool that allows you to finance slow-paying invoices from creditworthy clients. A factoring company can advance up to 85% of the invoice value as soon as you submit the invoice to your client. This advance gives you the funds to operate your business and grow.

Your company gets the remaining 15%, less a small fee, once your client pays in full on their regular schedule. Qualifying for factoring is relatively easy, and lines can be deployed in a week or so. Learn more about invoice factoring.

Asset based loans

Asset based lending is a comprehensive financing program that allows your company to finance accounts receivable, machinery, and inventory. It’s provided to midsize companies that have outgrown a factoring facility. Qualifying for an asset based loan is easier than qualifying for a conventional line of credit. Lines can be deployed in a few weeks. Learn more about asset based loans.

Inventory financing

Inventory financing is usually offered as an add-on to an existing factoring plan or as part of an asset based loan. It allows wholesalers and manufacturing companies to leverage their inventory and work-in-progress. This strategy provides them with additional working capital which can be used to fulfill larger orders or pay for business expenses. Learn more about inventory financing.

Do you need financing?

We are a leading provider of invoice factoring, asset based lending, and inventory financing. For a quote, fill out this form or call us toll-free at (877) 300 3258.