How to handle unpaid invoices

Invoicing
Invoicing

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  1. Introduction
  2. How unpaid invoices affect business health
  3. Common causes of unpaid invoices and how to prevent them
  4. Warning signs for non-payment
  5. Best practices for invoice collection
    1. Payment terms and conditions
    2. Following up on overdue payments
    3. Customer relationships
  6. Legal avenues for recovering unpaid invoices
  7. How to use technology for accounts receivable management
    1. Invoices
    2. Online payments
    3. Real-time reporting
    4. Business alerts
    5. Communication tools
    6. Integrations and APIs
    7. Cloud-based platforms
    8. How Stripe can help

Unpaid invoices are bills or invoices that a business has issued to its customers but that have not yet been paid. These invoices are considered accounts receivable for the business, meaning that they are expected future cash inflows that the business is entitled to receive. Unpaid invoices can affect a company's financial health, and a 2022 study found that 49% of invoices issued by US businesses become overdue. It's important to collect unpaid invoices, as revenue that has not yet been realised in cash form can affect the business's ability to manage its finances and invest in growth or operations.

Below, we'll discuss unpaid invoices and their business implications: what causes them, early indicators, how to prevent them and how to respond when they do occur. Here's what you should know.

What's in this article?

  • How unpaid invoices affect business health
  • Common causes of unpaid invoices and how to prevent them
  • Warning signs for non-payment
  • Best practices for invoice collection
  • Legal avenues for recovering unpaid invoices
  • How to use technology for accounts receivable management

How unpaid invoices affect business health

Unpaid invoices can affect a business's financial health in the following ways:

  • Cash flow: Businesses rely on a steady inflow of cash to cover operational costs such as salaries, rent and utilities. When payments are delayed, it can create cash flow gaps, making it challenging for the business to meet its financial obligations.

  • Resource allocation: Managing unpaid invoices often requires additional resources, such as time and staff to follow up with clients and attempt to collect outstanding payments. This effort diverts resources away from other productive activities, potentially affecting overall business efficiency.

  • Budgeting: Uncollected revenue from unpaid invoices can make it difficult for businesses to forecast their finances accurately, complicating budgeting and financial planning and making it harder to allocate resources effectively for future projects or investments.

  • Credit: Businesses often rely on lines of credit or loans for their operations and growth. High levels of unpaid invoices can affect a business's credit standing, making it more difficult or expensive to secure financing.

  • Investment and growth: The uncertainty and financial strain caused by unpaid invoices can limit a business's ability to invest in new opportunities or areas of growth. Without reliable cash flow, it's challenging to fund innovation, expand operations or take on additional staff.

  • Supplier relationships: Unpaid invoices can strain a company's ability to pay its suppliers on time, which may harm business relationships and lead to less favourable terms in the future.

Common causes of unpaid invoices and how to prevent them

Frequent unpaid invoices can both affect financial health directly and indicate deeper issues within the business, such as problems with the product or service quality, customer satisfaction or the effectiveness of the company's credit control processes. Businesses should both mitigate the immediate effects of unpaid invoices and seek to understand the underlying reasons for their occurrence. Here are the common causes behind unpaid invoices, along with some tips to prevent them.

  • Poor communication: Customers might not pay invoices because of misunderstandings or lack of clarity about the payment terms or details of the products or services.

    • Prevention: Communicate clearly with customers about payment terms, deadlines and the details of the goods or services provided. Confirm that the invoice includes all the necessary information and is sent to the right person or department.
  • Disputed charges: Customers might not pay an invoice if they disagree with the charges or are dissatisfied with the goods or services received.

    • Prevention: Provide high-quality products or services to avoid disputes. Have a clear process in place for addressing complaints or disputes quickly and effectively.
  • Inaccurate invoicing: Errors in invoicing, such as listing incorrect amounts, billing the wrong customer or not itemising services, can lead to delayed payments.

    • Prevention: Implement thorough checks to ensure that all invoices are accurate and complete before sending them out. Use invoicing software to reduce the risk of human error.
  • Complex payment processes: If the payment process is complicated, customers might delay payment due to the inconvenience.

    • Prevention: Make the payment process as straightforward as possible. Include multiple payment options and clear, simple instructions.
  • Customer financial difficulties: Customers might face their own cash flow problems, affecting their ability to pay on time.

    • Prevention: If feasible, conduct credit checks on new customers or for large orders. Consider requiring deposits or partial payments in advance for larger projects.
  • Lack of follow-up: Customers may forget or deprioritise payment without timely reminders or follow-up from the business.

    • Prevention: Implement a systematic follow-up process for unpaid invoices. Send reminders before the due date and follow up promptly if a payment is late.

Warning signs for non-payment

Businesses that recognise red flags for non-payment can take proactive measures and mitigate risks associated with unpaid invoices. Here are some warning signs that a customer might not pay on time or at all.

  • History of late payments: If a customer has a history of paying late or has been inconsistent with their payments in the past, this pattern has a good chance of continuing. Monitoring payment histories can help identify these trends.

  • Poor communication: A customer who is unresponsive or consistently avoids communication, especially regarding invoices or payment queries, may be at risk of non-payment. Difficulty in reaching the right person or department for payment matters can also be a red flag.

  • Financial instability: Be aware of signs that a customer may be experiencing financial difficulties. This could include news about layoffs, public financial losses or industry downturns that could affect the customer's ability to pay.

  • Disputes and complaints: Frequent disputes over invoices or complaints about goods or services, even if they seem minor, can be a precursor to non-payment. These might be used as reasons to later withhold payment.

  • Sudden changes in order patterns: A sudden increase or decrease in orders without a clear reason can be a sign of trouble. For instance, a large, unusual order might indicate that a customer is extending beyond their means.

  • Unwillingness to provide financial information: If a customer in a business-to-business (B2B) transaction is reluctant to provide credit references or financial information, this could indicate potential payment issues.

  • Change in contact information: Frequent changes in billing addresses, contact numbers or key members of staff without clear communication can be a bad sign, indicating a possible attempt to evade payment responsibilities.

  • Unusual urgency: If a new customer is pushing unusually hard for a rush job without a willingness to accommodate rush fees or up-front payment, it could be a sign that they're planning to receive the service or product without paying.

  • Negotiation of payment terms after delivery: A customer who tries to renegotiate payment terms after receiving goods or services may be looking for ways to delay or reduce payment.

  • Partial payments: While partial payments can sometimes be a good faith effort to settle an invoice, they can also indicate a customer's inability to pay the full amount.

Recognising these warning signs early can help businesses to implement appropriate measures, such as requiring up-front payments, adjusting credit terms or increasing monitoring and follow-up efforts to minimise the risk of non-payment and protect their financial health.

Best practices for invoice collection

Payment terms and conditions

  • Define payment terms up front: Clearly outline payment terms, including due dates, acceptable payment methods and any potential late fees before commencing work. Have the customer acknowledge these terms in writing.

  • Customise terms based on risk assessment: Adjust payment terms based on a customer's credit. Consider requiring shorter terms or up-front payments for higher-risk customers.

  • Incorporate payment terms into contracts: Embed your payment terms within your contracts to legally enforce your expectations regarding payments.

  • Issue transparent invoices: Send detailed invoices with itemised services or products and instructions on how to pay.

Following up on overdue payments

  • Communicate promptly: Initiate contact as soon as a payment is overdue. The first reminder should be friendly, assuming that it may be an oversight or minor issue.

  • Follow up regularly: Have a systematic approach for follow-up, including a schedule for reminders via various communication channels (e.g. email, phone calls and letters). Consider using invoicing software that automatically sends reminders for overdue payments, keeping track of all communication.

  • Establish an escalation process: Your escalation process for overdue payments should include when to cease ongoing work, involve collection agencies or take legal action.

  • Document all communication: Keep detailed records of all interactions with the customer regarding payment follow-ups. This can be important for any potential legal proceedings.

Customer relationships

  • Communicate empathetically: Approach each interaction with understanding and empathy. Recognise that customers can face temporary financial issues and express a willingness to work with them.

  • Negotiate payment plans: If a customer is facing genuine financial difficulties, be open to negotiating realistic payment plans while ensuring that your business's needs are also met.

  • Preserve professionalism: Even in challenging situations, maintain professionalism. Avoid confrontational language and focus on finding solutions.

  • Value the relationship: Emphasise the importance of your business relationship in communications, signalling that you value the ongoing partnership beyond just the transaction.

  • Request feedback: After resolving payment issues, seek feedback on how the situation was handled and what could be improved. This can improve your processes and customer relationships.

If your business encounters persistent non-payment of invoices despite exhaustive internal collection efforts, you may need to consider legal avenues for recovery. Different scenarios will come with different options. For example, if the debtor is based in a different country, the complexity of debt recovery increases – you'll need to navigate the legal systems of multiple countries and might need to partner with legal entities or debt collection agencies specialising in international debt. Throughout the debt recovery process, it's important to comply with local laws and regulations, such as the Fair Debt Collection Practices Act (FDCPA) in the United States, for example, which sets standards for the treatment of debtors and prohibits abusive collection practices.

Before pursuing legal action, assess the cost-effectiveness of legal proceedings, considering legal fees, court costs and the debtor's ability to pay. Sometimes, writing off the debt or settling for a lesser amount might be more pragmatic. Consult a lawyer who specialises in debt collection or commercial law to understand your options and the likelihood of success based on your specific circumstances before taking any steps on your own.

Potential legal avenues for debt recovery are outlined below:

  • Demand letter: Before initiating formal legal action, a demand letter is often sent to the debtor. This letter outlines the unpaid amount, the history of attempts to collect it and a final deadline for payment – often indicating that legal action will be taken if the payment is not received by the specified date.

  • Small claims court: For relatively small amounts, businesses can file a claim in a small claims court. The maximum amount that can be claimed varies by jurisdiction, ranging from US$2,500 to US$25,000 in the US. This process is generally quicker and less formal than higher courts, and in many cases, legal representation is not required.

  • Civil lawsuit: If the amount exceeds the small claims threshold, the next step is to file a lawsuit in a civil court. This process is more formal and complex and typically requires legal representation. The court has the authority to issue a judgement against the debtor if the claim is successful.

  • Mediation or arbitration: Before or during the legal process, parties might agree to alternative dispute resolution methods, such as mediation or arbitration, both of which involve a neutral third party. These methods can be faster and more cost effective, creating a mutually agreeable solution without a court trial.

If you do go to court and receive a judgement in your favour, collecting the debt can still be challenging. The following steps may be taken to enforce the judgement:

  • Writ of execution: This court order enables the seizure of assets or bank accounts belonging to the debtor to satisfy the debt.

  • Garnishment: This legal process allows the creditor to intercept funds that are due to the debtor, such as wages, to pay off the debt.

  • Lien: Placing a lien on the debtor's property ensures that the debt will be paid off when the property is sold.

How to use technology for accounts receivable management

Using technology for accounts receivable management can simplify the process, reduce errors and improve efficiency. Here's how businesses can use technology to manage their accounts receivable:

Invoices

  • Automated invoice generation: Use software to generate and send invoices to customers automatically. This ensures timely billing and reduces manual errors.

  • Digital invoice delivery: Send invoices electronically via email or through online portals for faster delivery and easier tracking.

Online payments

  • Integrated payment systems: Use platforms that allow customers to pay invoices directly online. For example, Stripe offers a suite of payment processing tools that can be integrated into your invoicing system and allow customers to pay by credit card, bank transfer or other methods.

  • Alternative payment methods: Online payments allow for a wider variety of payment options for customers, from bank transfers to buy now, pay later (BNPL).

Real-time reporting

  • Dashboards: Use software that provides real-time dashboards showing the status of accounts receivable, including outstanding invoices, paid invoices and ageing reports.

Business alerts

  • Custom alerts: Set up alerts for overdue invoices, payment confirmations and other key metrics to stay informed and respond quickly to any issues.

Communication tools

  • Automated reminders: Implement systems that automatically send payment reminders to customers as due dates approach or when invoices become overdue.

  • Customer portals: Provide a customer portal where clients can view their invoice history, pay outstanding invoices and communicate with your finance team.

Integrations and APIs

  • ERP and CRM integration: Integrate your accounts receivable management software with existing enterprise resource planning and customer relationship management systems for a unified view of customer interactions and financial data.

  • APIs: Use application programming interfaces (APIs) to connect different systems and automate data transfers. For instance, Stripe's APIs allow for easy integration with other financial or business management tools, enabling a cohesive workflow.

Cloud-based platforms

  • Accessibility: Use cloud-based platforms to access your accounts receivable data from anywhere, allowing your team to manage and monitor invoicing and payments remotely.

How Stripe can help

  • Automated invoicing: Stripe's automated invoicing system can automatically generate and send invoices, track their status and facilitate direct payment through the invoice – expediting the payment process and reducing the administrative burdens associated with these processes.

  • Automated payments: Stripe also has tools to automate recurring payments for subscription-based models and to help with reconciliation and reporting.

  • Varied payment methods: Stripe's payment platform supports a wide range of payment methods to give customers maximum flexibility in how they complete payments.

Explore how Stripe can help automate billing, invoicing and payment collections.

The content of this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy or currency of the information in the article. You should seek the advice of a competent lawyer or accountant who is licenced to practice in your jurisdiction for advice on your particular situation.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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