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Unpaid invoices are the bane of many small business owner. Not only do they lead to cash flow gaps and challenges, they can also make it challenging for you to go after growth opportunities due to a lack of working capital. Unpaid invoices frequently cause cash flow problems due to lengthy net terms, and even with extended net terms, invoices are paid late sometimes.
According to a QuickBooks survey of 2,000 mid-sized businesses, the average amount of late customer payments owed to them is $304,066. The same survey showed that 65% of businesses said they spent 14 hours each week on average completing administrative tasks related to collecting payments. This adds up to nearly two full days of valuable work time that could have been better spent on growing the business.
In our experience, successful SMBs who are making sales often struggle with cash flow because of net terms and unpaid invoices. It stresses them out thinking about how to make payroll, and many find themselves having to turn down growth opportunities just because they don’t have the necessary working capital to staff up, buy materials, or purchase equipment. There are a variety of approaches you can use to deal with unpaid invoices, including setting clear payment terms, following up regularly, and selling your unpaid invoices, that we’ll cover.
What Is an Outstanding Invoice?
An outstanding invoice refers to an invoice that has been issued by a seller or service provider to a customer but has not been paid in full or settled yet. It represents an amount owed by the customer to the seller for goods delivered, services rendered, or both. When an invoice is considered outstanding, it means that the payment due date specified on the invoice has not been met, and the customer still has an outstanding balance.
Businesses typically track outstanding invoices as part of their accounts receivable management. They may have processes in place to follow up with customers, send payment reminders or overdue payment notices, and actively pursue the collection of outstanding amounts.
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What Can I Do About an Unpaid Invoice?
There are several ways to improve your payment cycle, reduce delay in payment, and reduce the amount of invoices that go unpaid to begin with, and several things you can try after an invoice has become overdue. (Without taking legal action.)
1. Set Clear Payment Terms
Setting clear payment expectations is crucial for effective financial management, maintaining healthy cash flow, and limiting your number of unpaid invoices. Clear payment terms outline the expectations and obligations regarding when and how your customers are expected to make payments for the goods or services your business provides. Here are some key elements to consider when setting clear payment terms:
Payment Due Date: Clearly specify the date by which payment is expected. This helps both parties understand the timeline for settling the invoice.
Payment Methods: Specify the acceptable methods of payment, such as cash, check, bank transfer, or online payments. Clearly communicate any preferred methods to streamline the payment process.
Late Payment Fees: Clearly state any penalties or charges that may be imposed for late payments. This can serve as an incentive for timely payment and discourage delays.
Payment Terms and Conditions: Include any additional terms or conditions related to payments, such as partial payments, instalment payment plans, or specific invoicing requirements.
Communication Channels: Provide clear instructions on how customers should communicate any payment-related inquiries or issues. This can include contact information for the accounts receivable department or a designated point of contact.
Contracts and Agreements: For larger transactions or long-term arrangements, consider formalizing invoice payment terms in written contracts or agreements. This provides a legally binding document that clearly outlines the payment obligations and protects both parties, including specifying when legal action may commence. Check out our blog on customer contracts for more info.
2. Invoice Quickly
Invoicing quickly following completing of the job means your service is fresh in the mind of your customer. The sooner your invoice gets to your customer, the quicker it is likely to be processed. By sending the invoice on time, you can hold your customer accountable for paying on time. It’s also important to consider how you’re sending invoices. QuickBooks, for example, allows you to get paid two times faster than with paper invoices.
If you want to get paid fast, factoring your unpaid invoices can solve that better than invoicing quickly alone. Struggling with overdue invoices could mean much worse than cash flow issues. Factoring companies can process funding applications in days — way faster than traditional bank financing like loans or lines of credit. Factoring can be largely effective if you have a large invoice that could free up significant cash and help your business grow.
3. Communicate Due Dates
It is important to provide a clear and specific payment due date to ensure that both you and your customer have a clear understanding of when the invoice should be settled. This also helps establish a timeline for the payment process and facilitates smooth and timely payment of the invoice. You are 8x more likely to be paid on time if you put a due date to your invoice. Your customer contract should also outline what will happen if the due date is missed, clearly stating any penalties or charges that may be imposed for late payments.
4. Do Not Give Early Payment Discounts
We know this goes against the grain, but we do not recommend giving early payment discounts. This is based on our own experience as entrepreneurs, and our clients’ experience. For one thing, they are just too expensive. As an example, a 5 percent discount on your invoice with 30-day payment terms is basically 60 percent APR! Also, one situation we’ve seen on multiple occasions is the customer pays on time and expects the prompt payment discount anyway.
5. Follow-Up After the Due Date Has Passed
Once the invoice is sent out, set yourself a reminder to follow up. A first step is to check with the client ahead of the due date to ensure they received the invoice, as sometimes emails are overlooked or filtered into spam folders, and letters can get lost in the mail. This gesture is appreciated and sets a precedent for a two-way communication. You can then follow up with a friendly reminder email or phone call on the due date, a couple days after, a week after, and two weeks after.
Effective follow-up means that you must be polite, mindful, but responsive and direct at the same time. If you’re unsure of how to ask for payment professionally, our late payment email templates make it easy. We know all too well the struggle business owners face, spending more time and resources than they need to chasing payment from clients. This is one area where invoice factoring can help, because your customer pays the factoring company, who manages the A/R process on your behalf.
6. Make It Easy to Pay
You need to make it easy for customers to pay. The easier the payment process, the faster you will be paid. Here are some best practices for making payment easy for customers to make (along with what we recommend most):
- It begins with an easy invoice and a flexible payment method. Electronic invoices sent using an accounting software and invoicing software platform like QuickBooks make the process simple.
- Choosing an electronic payment system makes the process faster. Offering a variety of payment methods makes getting paid quickly more likely. Online platforms can simplify the payment process on both ends.
- Clear payment instructions. Clearly communicate payment instructions on your invoices, and provide all the necessary details for your customer to send payment ahead of the payment deadline.
- Offer mobile-friendly solutions. Mobile-friendly payment options and responsive design can enhance the customer experience. Additionally, more than half of emails are first opened on a mobile device, so including mobile-friendly payment options is a no-brainer.
By focusing on making the payment process as smooth and easy as possible, you can ensure your unpaid invoices are more likely to get paid on time.
7. Sell Unpaid Invoices: Get Your Invoices Funded in Days
If you’re wondering how to get invoices paid faster, invoice factoring is a financing solution that can help address the issue of unpaid invoices and improve cash flow for businesses. It is a form of accounts receivable financing where a company sells invoices for cash. You essentially sell the invoice to a factoring company at a discounted rate in exchange for immediate payment. The factoring company makes a direct bank deposit in days for the value of the invoice, minus any fees. The factor then works with your customer to settle the invoice according to the original invoice terms. (Get more info on what invoice factoring is.) Some benefits of invoice factoring include:
- Quick access to funding. Invoice factoring makes it easy to get paid on your terms, often in just a couple of business days — and way ahead of net terms.
- Flexible. Getting paid in a way you control is easy with invoice funding, as you can pick and choose the invoices you want to fund, when you need a quick boost of capital. (Specific to FundThrough)
- Easy process. The best invoice factoring companies use technology and other innovations to make the funding process quick and easy.
- Less admin burden. When you factor an invoice, the responsibility of payment collection shifts to the invoice factoring company, streamlining the accounts receivable process. This relieves you from the task of chasing down outstanding payments and allows you to allocate more time and energy towards your core business activities instead of worrying about getting paid.
- No bank hassles. Traditional loans and bank financing often have a tedious process to apply and lengthy approvals, whereas invoice factoring offers a more streamlined alternative. With traditional financing, qualifying can be challenging due to the strict credit history requirements. However, factoring relies on the creditworthiness of your customers, making the process faster and more accessible.
- No debt. Factoring is not a loan; it turns unpaid invoices into cash without adding any debt to your balance sheet. It also lessens the risk of non-payment or payment delays.