When a business struggles to collect unpaid invoices, its own cash flow can be negatively impacted and, in turn, its ability to pay suppliers, cover overheads and fund operations.
What can a business do when an invoice deadline has passed and payment still hasn’t been received?
To ensure your business is set up in terms of cash flow and management, you need the right systems and strategies in place.
The team at ScotPac helps clients not just access financial solutions, such as Invoice Finance, to overcome these challenges but provide expertise in exploring strategies for helping your business collect unpaid invoices from customers.
The Real Cost of an Invoice that is Unpaid
The cost of an unpaid invoice might seem obvious, but it’s actually more than just the value on the invoice itself. According to some research, up to 50% of businesses receive invoice payments later than the 30 days standard terms.
As mentioned at the top of this article, when that payment does not come into your business’s account, you’re going to have less cash flow with which to invest in ongoing activity or growth.
But beyond that, you and your team are going to be forced to waste time and energy chasing those payments, rather than similarly investing the precious resources into what is actually going to help your business succeed. Of course, this incurs an administrative cost to your business, but it will also incur an opportunity cost.
The opportunity cost can come in the form of not being able to top up stock levels, engage in marketing campaigns or take advantage of other revenue-generating initiatives that the market may present.
6 Strategies for Collecting Unpaid Invoices
Late payments and disruptions in cash flow is a leading cause of business failure for SMEs. So if your customer hasn’t paid you on time, you need to act sooner rather than later. After all, the longer an invoice goes unpaid, the less likely it is that it will ever be paid in full.
To help you with the challenge of collecting unpaid invoices, here are six strategies for approaching the problem without damaging your reputation, harming your cash flow, or destroying your customer relationships.
1. Implement a late payment surcharge
Charging a penalty fee for late payments will give customers an incentive to pay faster and on time. When they still don’t settle invoices, this same fee can help you recoup some of the expenses that go into chasing that invoice.
Make sure that any penalty fees are stipulated in the contract you have with your customer. This includes details such as payment terms and the amount being charged. Penalty fees can’t be implemented unless there is an agreement with the customer at the start of the contract.
One good way to ensure that this system is fair and transparent is to offer a corresponding discount for early payments. Some companies provide a 2% discount for invoices that are paid within 10 days, for example.
2. Follow up on invoices in writing
If the payment deadline is approaching or has passed, the first step you should take is a professional and polite email reminder. Some customers may have simply forgotten and will appreciate you reaching out.
A friendly reminder requesting prompt payment and a clear outline of how that payment can be facilitated will help you foster a relationship of mutual respect with your customer and encourage them to be more punctual moving forwards.
3. Send a statement of outstanding costs
If the strategy above has not yielded results and the invoice remains unpaid, your next email or letter should contain a statement of outstanding cost. This statement should include information about the applicable penalty fees (subject to prior agreement).
Accordingly, it is also important that you reprioritise the work in your pipeline. Continuing to provide services or products to a customer who has not settled their account is not likely to motivate them to pay their invoices.
4. Speak to the client
The next step is more difficult for both the business owner, as it requires time, effort and energy, and for the customer as it is harder to avoid a request for payment on the phone than it is to just ignore an email.
In the conversation, first confirm that they received your previous correspondence requesting payment and see if they have an issue paying. The last thing you want is to realise that it was your payment system or instructions that was causing the delay.
By being transparent and polite on the phone, you can help your customer understand the situation and you can get a feel for their intentions. If your customer is experiencing their own cash flow management issues, consider discussing a documented payment plan and outline how the account can be settled over a specific period.
If your customer ignores your calls or does not agree to pay the invoice one way or another, you may need to get outside help.
5. Get professional assistance
Debt collection agencies are experts at recovering payments from debtors. They can take the headache out of chasing up on unpaid invoices and provide customised solutions to help you recover as much of the debt you’re owed as possible.
Invoice Finance is another solution available. This financial facility, which is offered by our team here at ScotPac, allows you to access the money locked up in unpaid invoices ahead of payment so you’re not waiting for your customer to pay. Using the invoices themselves as collateral you can receive up to 95% of the total value of your invoice or invoices as a cash advance, with the rest to be received once the accounts are settled (minus administrative fees).
6. Seek legal advice
Once you have exhausted the above options, one last avenue is legal assistance. The right legal action available for you will depend on a number of factors, including the type of business you have and the type of business your customer has.
Always consider the expense and energy required when hiring a lawyer and ensure it is justified by the value of the unpaid invoice you are facing.
You can find out more about what options are available to you on the New Zealand Government business website here.
Getting Paid Early with ScotPac
Outstanding invoices can be detrimental to the long term success of a company, so knowing how best to collect unpaid accounts should be a priority for small and medium sized businesses.
Fortunately, our lending specialists at ScotPac have the breadth and depth of knowledge to help you receive the cash injection your business needs – in as little as 24 hours!