As a freelancer, you probably spend a lot of time invoicing customers. Experts predict that online invoicing will grow 80% by 2027. However, late payments and overdue invoices are problems faced by many small businesses. In this article, we will take you through everything you need to know about invoicing, including:
- What outstanding and past due invoices are
- Why it is important you get paid on time
- How to get past due invoices paid
- Tips for avoiding late payment
What Are Outstanding Invoices?
You provide a service to your client. Which is then followed by the creation and sending of an invoice. As soon as you send the invoice to the client, it becomes an outstanding invoice. Outstanding invoices are invoices that are awaiting payment but are within the specified payment period.
On your invoice should be the invoice number, terms of payment, date of payment and accepted methods of payment. While all of this information is useful to the client, the payment due date is very important. It tells the client they have to pay the invoice within a certain period. From the day you send the invoice to the client, until payment, you call the invoice outstanding.
What Is a Past Due Invoice?
Having established what an outstanding invoice is, the next critical term is a past due invoice. The clue is in the name. On your invoice is a payment due date. If the date of payment has passed and the client has not made payment, the invoice becomes overdue.
This can become problematic for a business. You then have to chase the client to pay the invoice. Whenever you have to chase a client, it's costing you twice. Once for the past due invoice and again for the cost of the staff members' time.
This also highlights the importance of keeping track of invoices to ensure payment in a timely manner. It’s very easy to lose track of when invoices are due, especially if your business is very productive and serves a lot of clients. Utilising an invoicing software can help your business track invoices to avoid late payment.
What is the difference between outstanding invoices and past due invoices?
An outstanding invoice is one that you have sent to a client and are awaiting payment, but has not yet exceeded the payment due date. Comparatively, a past due invoice is one that is still awaiting payment, but the specified payment date has passed.
Past due invoices can be problematic for businesses of all sizes. Here's why.
Why is it important you get paid on time?
Clients delaying payment is not just an inconvenience. It can have a significant impact on your business. Small businesses need timely payments, as it can affect cash flow drastically.
How do receivables impact cash flow?
A receivable is an amount your client owes you that is not in your bank account. Your cash flow is the money going in and out of your bank account. When you send an invoice your receivables increase, as your client now owes you money. If your customer pays you late, your receivables increase. This negatively affects your cash flow, as the money is not in your bank account.
Conversely, if your clients are paying their invoices promptly, your receivables will decrease. Meaning you have more cash in your bank. A good thing when running a business.
How is value lost on money owed and how does this affect your business?
If you are owed money over significant periods, the value of the money your clients owe you can change. Statistics have shown that money that is overdue by 90 or more days can sometimes be worth 20% of the original value.
Not only can the value of money owed decrease, but having a bulk of outstanding payments can place additional stress on your business. If your receivables are too high, meaning they owe you a lot of money, and you are still paying bills and employees on time, you risk going into an overdraft situation.
If you pay bills, suppliers, or employees late, your business can be put under additional stress. This will harm its overall value. In order to avoid this, ensure clients are paying their invoices on time so you maintain a positive cash flow.
How to get past due invoices paid.
Now you are beginning to understand why it’s so important that clients pay invoices in a timely manner. Unfortunately, businesses constantly let invoices go overdue without getting payment. Largely because they don’t track invoices effectively, or they don’t know how to ask their big clients to pay their invoices. Here are four things you can do to get overdue invoices paid.
1: Follow up with your client
Maybe your client is slightly unorganised, or that it was just an honest mistake they forgot to pay their invoices. Either way, the first thing you should do is send a follow up email to serve as a payment reminder. Remind your client that they have an unpaid bill that is now overdue. Include the payment details to make payment easier for your client.
Having a follow up email template can streamline this process for employees. This makes it quick and easy to send a followup when an invoice is past due. Make sure your wording is firm, explaining that it is vital they make payment as soon as possible. Always give your clients a way of contacting you back in case they are experiencing a genuine issue.
Clients can evade emails, so if you still haven't heard from the client, try calling them. It is more challenging to avoid phone calls and this can help you apply some pressure to the client.
2: Determine if there is a problem
As mentioned previously, your customer may be experiencing a genuine issue impeding their ability to pay the invoice. There are several issues they may experience, like financial issues, administrative inefficiencies, or technical issues with payment methods. Any of these could disrupt the payment process, leading to a late payment.
If your client is experiencing hard times, you may have to reach a compromise. We will discuss this more in the section below. It is at this stage you need to assess the likelihood of recouping your costs. Is the issue something that you can solve, or is it out of your hands?
3: Figure out a reasonable solution
Now you have identified the issue your client is facing, you need to find a solution. You provided a service for them, so need to be compensated. If the client is just having administrative difficulties, ask if extending their deadline by a week or two would mean they can make payment.
If the client is having financial hardship, then you may have to change the way they make payment. This can be in the form of a payment plan. A payment plan proposes to spread the cost over a longer period rather than one large payment. For example, if the client owes you $6,000, you could suggest they pay you $2,000 per month over 3 months.
Alternatively, you may need the client to pay as much as they can, even if it isn’t the full amount. This is where you need to consider the needs of your business. Do you have enough cash flow to not receive the full amount? You need to ascertain how much this will negatively affect your business. For example, will you be able to pay employees without this money?
If you think you can withstand the loss of income, then you could deduct 25% or more of the invoice to try to recoup some of your losses.
4: Further Action
If you have sent follow up emails and tried to determine what the issue is to offer a solution, but the client will not pay their outstanding invoices, it is time to take further legal action. Unfortunately, this is not an ideal situation for a business owner to be in. Lawyers will bring with them expensive fees. Court cases do not settle quickly, so you may not get payment soon.
However, by pressuring the overdue payee with a threatening letter, you may get them to make payment. The threat of legal action presented in a demand letter could spur them into action. A demand letter is sent by certified mail by a lawyer that essentially threatens escalation to court unless they make payment.
If you have sent a demand letter and still have not received communication or payment by the specified date, speak to a lawyer about what your next steps may be. Alternatively, you could reach out to a debt collection agency. Some agencies will even buy unpaid invoices from business owners, allowing them to be done with the whole situation.
Tips for avoiding late payments
For the previously mentioned reasons, late payments can cause problems for large and small businesses. Remaining proactive and vigilant is the best way to avoid this issue. However, there are some additional strategies you can employ within your business to reduce the chances of a late payment.
The best way to avoid a late payment is to track the invoice. Luckily, invoicing software makes this very easy, allowing you to see when you have sent an invoice and how long until payment is due.
Keeping track of invoices will allow you to send friendly reminders to encourage timely payments. Your reminders can provide additional information about the payment process and ensure clients have easy access to your payment details.
If the due date for payment is approaching, send a payment reminder email to the client to ensure they are aware of the approaching deadline.
Establish a Payment Policy
Create a policy that covers every aspect of payment that you can share with clients. Clearly define exactly what you need clients to do so that they know what the expectations are.
Your policy could include charging late fees if clients fall behind on making payments. You could lay out exactly what steps you will take if an invoice becomes overdue. For example, sending your demand letter and contacting a collection agency.
Your policy should also include your business’s payment details and what methods of payment you accept. Reiterating your payment due date, i.e. 30 days after you have sent the invoice. This makes it easy for the client to know when payment must be made.
Take A Percentage Up front
Taking a deposit for services up front is not unheard of. This can be wise if you operate a small business where a loss of cash flow could be disastrous. Small businesses may not be able to afford legal fees if a client refuses to pay. Taking a 50% deposit at least allows you to recoup some of the costs.
Make Payment Easy
Clients will struggle to make payments in a timely manner if there is a limited choice of payment options. Make payments easy for your client as this will help them pay on time. Offer online payment with credit cards, direct bank transfers, cash and cheque payment options. After all, you want your clients' money, so make it easy for them to give it to you.
Allow Recurring Payments
If you have clients that regularly purchase the same service or products, encourage them to set up a regular payment via a direct debit or a recurring credit card payment. This way you get peace of mind knowing payment will be on time and can focus on giving the customer great service.
Utilise Accounting Software
Modern software can allow you to track invoices, keep up with due dates, send payment request emails and reminders to pay outstanding invoices. Utilising modern software will give small business owners time to focus on the things that matter by making invoicing simple.
How do you collect outstanding invoices?
Your clients can pay outstanding invoices in several ways. As a small business owner, try to make it as easy as possible to pay invoices. Some of the ways a client can pay are:
- Recurring credit or debit card payments
- Direct Bank Transfer
How long can an invoice be outstanding?
An invoice is called outstanding up until the due date for payment. After the payment due date, the invoice is known as a past due invoice.
How do I request payment from past due invoices?
You should carry out payment requests using an email template. Reiterate the terms of payment and ways the client can make payment. Using a template helps streamline the process and saves on your, or employees, time. If the client still has not paid, try a phone call, as this is harder to avoid. Failing that, reach out to a lawyer to send a demand letter followed by legal action if necessary.
How do you deal with clients not paying invoices?
Getting money from past due invoices can be challenging. The best approach is to:
- Follow up with a friendly reminder.
- Find out if there is a particular problem the client is having.
- Offer a solution to the problem, like setting up a payment plan.
- If all else fails, send a demand letter and speak to a lawyer about legal action.
How do you enforce an invoice payment?
Enforcing invoice payment is best achieved by remaining vigilant while the invoice is outstanding and not letting it progress to a past due invoice. Send reminders regularly notifying the client of the due date for payment and how to pay.
Having a clear policy with a late payment fee can also motivate a client to pay invoices on time, as they don’t want to incur additional costs.