Small Business Owners Guide to Collecting Unpaid Accounts Receivable

As a small business, there’s nothing more exciting than making a sale. But unless your clients pay you in full before you get to work, most small business owners run into unpaid invoices at some point. Sometimes this results from a client forgetting to pay, but other times you will run up against some reluctance to pay.

Regardless of the client’s reasoning and before you write off unpaid invoices as bad debt, we’ve outlined steps below that will lead you through the process of collecting outstanding invoices.

Calculate the Total Amount Due on Outstanding Invoices

When running your own business, it’s important to keep a close eye on the money your clients owe you. The best way to do this is to invoice your clients regularly and keep track of payments.

You’ll need to carefully monitor your accounts receivable balances to ensure that you have proper cash flow and working capital for your business operation. After all, that’s how you keep the lights on and pay your employees.

If you find yourself in a situation where a client owes you money, there are a few things you can do to calculate how much they owe you. First, look at your outstanding invoices that are past due date and add up the total amount outstanding. Next, check your records to see if the client has made partial payments. If so, subtract those from the total. Finally, include any interest or late fees that may be applicable. Once you have completed those steps, you’ll know how much money the client owes you.

When calculating the balance due, ensure you are up-to-date on recording any deposits. You should check your bank account and mail to ensure that you have considered every payment before reaching out to clients. Most accounting software, if properly maintained, can help you track your outstanding balances.

Make sure your calculations take into account the payment terms of your invoices. If your payment terms include 30 days for the client to pay, you should not consider the balance as past due until 30 days from the time the invoice was originally printed.

Remember that accurate billing and deposit records will prevent you from demanding payment from a customer who has already paid (and, thus, potentially damaging your relationship with your client), and will also let you keep track of past due invoices with ease.

Don’t Be Afraid to Ask Your Customer for Money That Is Owed to You

If you’ve performed the work and haven’t been paid, it’s time to take action. The sooner you do, the better off you’ll be. Waiting too long only gives the customer more time to come up with an excuse for not paying or to try to stall you even longer.

As a small business owner, you need to be comfortable billing clients and asking for payment unless you have outsourced your accounts receivable to a third party. As the owner, you will likely be involved in billing questions even if you did outsource your accounts receivable.

Often, an outstanding unpaid invoice is simply a result of the customer forgetting to pay the bill. Reaching out to the client via email, mail, or phone will usually resolve the issue.

If you don’t hear back or if they give you the run-around, it’s time for a more formal approach.

Send a Polite Reminder to the Customer

Your next step is to send a polite email reminder to the customer. This formal request for payment should restate the work you performed, when you completed it, and how much you’re owed. Include your invoice number and mention any late fees that might be incurred if payment isn’t received soon.

If there are multiple invoices outstanding, you should send a customer account statement showing each of the invoices along with the due dates and balances.

If you only take payments by check, you should give the customer time to mail in a check. If you accept online payments through credit cards or ACH, you do not need to be as patient.

Although it’s important to keep in mind that if your client base is composed of repeat customers (or potentially repeating customers) you need to tread carefully to not damage your relationship. However, if you have a client that continuously refuses to make payments, the relationship may not be worth preserving.

Follow Up with a Phone Call if There’s No Response To Your Reminder

If you’ve sent a reminder email and there’s still no response, it’s time to follow up with a phone call. This is where things can start to get a little uncomfortable, but it’s important to be firm yet polite. You need to remember that you are owed payment for the work performed and asking for that payment is not out of line or rude.

Explain that you’ve been trying to get in touch with them about your outstanding invoice, but you haven’t had any luck. Mention the date of your services and how much is owed. If they still don’t have a good answer for you, let them know that you’ll be taking further action if payment isn’t received soon.

Most people respond best to deadlines. At this point it’s worth providing an additional incentive for action such as additional late charges or collection actions if the invoice is not paid within a certain amount of time. On the flip side, you could offer to waive the existing late fees if the rest of the balance is paid in full within a few weeks.

Often offering an incentive with a time limit spurs clients to action.

Send a Final Invoice

If you’ve tried all of the above and are still not getting anywhere, it’s time to send a final invoice with a late payment penalty. This is essentially a last-ditch effort to get paid before resorting to more aggressive measures.

Be sure to include all of the relevant information from your original invoice, the date of service and how much is owed. Then add on a late payment fee of a fixed amount or a percentage of the bill. You should adhere to any agreements with the customer regarding invoice payments. This will serve as a motivator for the customer to finally take action and pay what they owe.

Keep Good Records of All Communication with the Customer

Throughout this process, it’s important to keep good records of all communication with the customer. This includes every email, phone call, and piece of written correspondence. This will come in handy if you need to take further legal action down the road.

Records can include call logs, emails, or snail mail correspondence. For phone calls, check with your service provider to see if they can give you official records of calls made by your office.

Use a Collection Agency if Necessary

If you’ve tried everything and you’re still not getting paid, then it might be time to involve a debt collection agency. Debt collectors should be considered a last resort, as it can damage your relationship with the customer. But if you’re owed a large sum of money and you can’t afford to write it off, then it might be your best option.

Collections agencies either take a percentage of any bills collected, or they purchase the outstanding invoices from you and keep whatever they can collect on the invoice. In either case, the fees for using a collection agency are substantial, but it’s better than not receiving any payment.

You should discuss the collection process before entering into an agreement with a collection agency so you are aware of how this will affect your client.

To avoid this situation in the future, be sure to screen your customers carefully, and only work with those who you believe will pay on time. You should also require a deposit upfront so that you’re not left holding the bag if things go south.

Alternative to Collection Agency

As an entrepreneur yourself, you know that sometimes business cash flow can hit a few bumps. If you believe that your customers will pay in the foreseeable future but just need more time to get the cash together to make the payment, you might consider invoice factoring.

Invoice factoring involves selling your outstanding, unpaid invoices to a third party who purchases them at a discount for cash. The discount may be 10-25% depending on the company and your financial position, but this may be less than the fee you would pay to a collection agency. You are required to pay the invoice company back (usually through daily or weekly payments) until the balance is paid in full.

Take Legal Action if Necessary

If all else fails, you can take legal action against the customer. This is usually a long and drawn-out process, so it’s not always worth it for small claims. But it might be your only option if you’re owed a large sum of money, then it might be your only option.

Remember that this could damage your relationship with the customer, so it’s not always the best option. You should also consider whether or not you have a good case before moving forward. If you don’t, you might waste a lot of time and money for nothing.

Your case will be stronger if you can provide documentation of the work performed, an agreement showing the amount billed, and records of your attempts to collect payment.

Even a win in small claims court may not get you the payment. While a win means that you are entitled to the money, small claims court cannot force the losing party to pay the balance due.

How to Avoid Unpaid Invoices

All business owners hope that their clients will honor their agreement and regularly pay their invoices, but since that’s not always the case, we’ve listed some steps below to help prevent missing payments going forward.

Collect A Deposit

Most deposits are only partial payments of the expected final billing amount, but having a partial deposit means that the customer is vested in your work. It also allows you to minimize your potential losses since you have already received partial payment.

Regularly Send Out Invoices/Statements

Customers are often unintentionally forgetful about bills. Sending out regular reminders will ensure that your clients are aware of the outstanding balances and therefore will be more likely to pay the balances due.

Have Preauthorization to Bill a Credit Card

You can have the client sign a preauthorization for billing their credit card once you have completed their work or at certain intervals. Though the client could dispute the charges, you should be able to win a dispute if you have their signed authorization and have completed the work.

Collect Fees Upfront

Depending on your type of business, it’s not unreasonable to ask for payment for your services or product before delivery. This may not be an accepted practice in every industry or in the service industry where the total bill is not known at the start of the engagement, but it is common in many other industries.

Consider Allowing Other Payment Methods

Some businesses still require payment by check. While this may make financial sense since it avoids credit card fees, many people simply do not own checkbooks anymore. Consider expanding the range of acceptable payment methods to include credit cards or Venmo to make it easier for customers to make payments.

Conclusion

Overall, collecting unpaid accounts receivable doesn’t have to be a monumental task. If you start with the best practices laid out above and keep good records, you can minimize the time and effort spent trying to collect your money, while keeping strong relationships with your clients.

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