Unpaid invoices can impact your cash flow and ability to pay suppliers and cover overheads.

So what happens when an invoice deadline has passed, and you’re still waiting for payment?

You need to have systems in place to ensure you get paid. Keeping cash flowing through your business is key to both survival and growth.

In this guide, we’ll explore the true cost of an outstanding invoice and what you can do to collect unpaid invoices from your customers.

The Actual Cost of an Unpaid Invoice

The true cost of a late payment is far more than the value of the unpaid invoice.

According to the Australian Small Business and Family Enterprise Ombudsman, late payments have significantly increased over the last year. On average, SMEs are forced to wait 37 days past due date to receive payment.

When an invoice is overdue, you’re forced to waste time and energy chasing the payment rather than investing those resources into activities that will grow your business.

There’s also the additional admin cost and the loss of opportunity due to funds being tied up that could be invested in new stock, marketing, and other revenue-generating initiatives.

A 2017 study showed a strong correlation between average late payment times and company failure rate:

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Unpaid invoices are a serious issue that should be a priority for your business.

6 Simple Steps To Collect an Unpaid Invoice

If your customer hasn’t paid you on time, you need to act. The longer an invoice goes unpaid, the less likely it is that you will be able to collect the total amount owed.

Here’s the six-step process you can use to collect payment without damaging your reputation or destroying your relationship with the client.

1. Charge a Late Payment Penalty

Charging a penalty fee for late payment can motivate clients to pay faster. It can also help you to recoup some of the expenses and time spent chasing the invoice.

If you plan to charge a penalty fee, you need to include the amount and the date it will go into effect in your contract with the client. You can’t charge a penalty fee if it hasn’t already been agreed with the customer at the start of the contract.

It’s also worth considering an early payment discount to encourage your customers to pay faster. For example, many companies offer a 2% discount if the invoice is paid within 10 days of being raised.

2. Follow Up in Writing

If the payment deadline is approaching and the invoice is still outstanding, your first step should be a polite email reminder.

There are many reasons why a client may not have paid yet. A friendly reminder may be all that is required to prompt payment. It can also be an opportunity to foster a deeper relationship with the client and seek out opportunities for more work.

3. Send a Statement of Outstanding Cost

If you haven’t received a response and the invoice is still unpaid, the next step is to send another email or letter containing a statement of outstanding cost.

You should explain that the invoice is now overdue and inform the client of any penalty fee if applicable.

If you are still working on a project for the client, you may want to reprioritise your work schedule. You should give any outstanding work for the client a low priority until you have received payment for the goods/services you have already supplied.

4. Call the Client

It’s much harder to avoid a request for payment over the phone than it is to ignore an email or letter.

Ask if the client has received your previous payment requests and if there is an issue with paying the invoice. Speaking to the client directly over the phone will help you understand the situation and your client’s intentions.

You may find that the client has cash flow issues that prevent them from paying the invoice in full. If this is the case, you should agree on a documented payment plan that details how much the client will pay over what period.

If the client ignores your calls or doesn’t agree to a payment plan, it’s time to raise the stakes.

5. Get Outside Help

If the unpaid invoice is still outstanding, your best option is to seek outside professional help. There are two options to help you collect the money owed to your business.

If the unpaid invoice is still outstanding, your best option is to seek outside professional help. There are two options to help you collect the money owed to your business.

Debt Collection Agency
Debt collection agencies are experts at recovering payments from debtors. You can free yourself from the headache of chasing the payment and focus on the growth of your business. The agency will have tried-and-tested methods for recouping the money owed.

You may find that informing the client that you plan to pass the unpaid invoice onto a debt collection agency prompts payment.

If you do require professional assistance, Integral Collections is a subsidiary of ScotPac that specialises in business debt recovery. We provide tailor-made solutions to achieve the best possible outcome while protecting your business reputation.

Invoice Finance
Large companies are some of the worst offenders when it comes to late payments. According to a report by Xero, Australian SMEs shoulder $115 billion worth of debt on behalf of large companies are corporations.

If you sell to large companies, Invoice Finance can help you access the money you are owed quickly, rather than waiting for your client to pay. You can use your unpaid invoice as collateral to receive up to 95% of the invoice value upfront as a cash advance.

Once the customer has paid, you receive the remaining balance less fees. Depending on the terms of the arrangement, the finance company may also manage the collections and account management.

Read our guide What is Debtor Finance? to learn more about Invoice Finance, including the different types of solutions.

6. Seek Legal Advice

When you have exhausted all other alternatives, your last option is to hire a lawyer. The exact legal action you will need to take will depend on the type of business your client is registered as – pursuing a legal case against a sole trader is different to a claim against a company.

At this stage, it’s essential to consider the potential costs. You need to determine whether the expenses and energy invested in recovering the debt will exceed the value of the unpaid invoice.

For smaller invoices, it’s sometimes more cost-effective to walk away and put processes in place to ensure the situation cannot happen again. For larger invoices, your debt collection agency may be able to offer legal advice and recommend a course of action.

You can learn more about the legal route and what is involved on the Australian Government Business website.

How to Avoid Unpaid Invoices

You can save time and money by preventing unpaid invoices before they become a drain on your resources.

Before entering into a contract, spend some time researching the new client to ensure they are a legitimate company with a good reputation.

It’s also important to set out your payment terms and expectations to prevent problems when the contract is complete. Explain when you will raise an invoice and how long the client will have to settle the bill. You should also make it clear if you plan to charge late fees.

Being upfront at the start of a relationship provides a solid foundation to grow the partnership.

Getting Paid Early with ScotPac

Now you know the actual cost of outstanding invoices and the steps you can take to collect money owed to your business.

The best solution is often to avoid overextending with a customer that is spending beyond their means. Here at ScotPac, we provide credit check services as part of our Invoice Finance facilities to ensure that your customers can pay for the goods and services you provide.

If you’re frustrated by late-paying customers, speak to our friendly team of business finance experts. We can help you collect your unpaid invoices and provide a cash injection to boost your working capital in less than 24 hours.