When you run a small business, there’s a lot to juggle. Chasing unpaid invoice payments is something you could probably do without.
Still, going to battle over outstanding invoices can be a regular thing if you’re a small business. According to the Federation of Small Businesses, the UK’s ‘poor payments culture’ costs the UK economy £2.5bn each year, with 30% of payments made late.
Each week, businesses spend much-needed time on admin. Whether it’s making phone calls, sending emails, invoicing or drafting late payment letters, this time adds up. Those hours could be better spent elsewhere, but you need revenue to stay afloat.
According to research by NerdWallet, over half of SMEs struggle with unpaid invoices. On top of this, over a third (39%) have reduced, or considered reducing, their overheads because of a client not paying invoices.
But what can you do? And why shouldn’t you just cut your losses if there’s an outstanding invoice?
Why is chasing unpaid payments important?
Chasing payments is important for any small business. Having healthy cash flow ensures you can keep paying your suppliers, staff or meet your forecasts. This means every penny counts. But it’s more than that too. Getting paid for your hard work is only fair.
Following up on unpaid invoices also helps to set the tone of your working relationship. When clients get that payments need to be made on time – or they may face late payment fees – they should respect this going forward.
Taking a few minutes to chase up payments now can also prevent the need for more serious legal action down the line.
Staff are likely to be more confident too if they know your business has a steady revenue stream. When they know clients aren’t paying what’s owed, people can worry about their job security and also the value of their work.
But if your to-do list is already jam-packed, it can be tempting to put off – or forget - an overdue invoice reminder email. Sometimes chasing an unpaid invoice is the only way to settle the matter.
However, that doesn’t make the task any easier. So how do you do it without souring a potentially valuable relationship?
How to chase an unpaid invoice
It’s fairly common practice to send follow up emails or reminders about unpaid invoices. So don’t overthink it. As long as your communications are polite and professional, your relationship with your client shouldn’t be negatively impacted.
When a customer is not paying an invoice, you need to be clear about what your expectations are from the very start. It’s a good idea to send reminders out before the payment is overdue. You can choose your own timelines but seven days before is usually a good place to start. You can then follow this up with regular follow-ups – just make sure it’s consistent across all your clients.
Ultimately, a client that doesn’t pay invoices won’t be a good fit for long. Creating an invoice management plan can help you decide when it’s time to end the relationship.
Start chasing invoices by:
1. Keeping and monitoring invoice due dates
The first step to tackling unpaid invoices is knowing what’s due and when. Think about creating a centralised list of payment due dates across all clients. Without it, it can be easy for items to slip by unpaid. You may want to outsource this to a specialist accounting firm if this is something you’re struggling to keep on top of.
2. Sending consistent invoice reminders
Reminder letters or emails should start before the due date. This is to maximise your chances of receiving payments on time. This is where your payment calendar comes in. So you might schedule the first reminder seven days before payment is due.
Repeat a few more times in the run-up to the due date. For instance, with three days to go and one day to go.
3. Sending overdue invoice alerts
Once an invoice becomes overdue, send a new email to notify your client. Keep the message simple, but mark the email as urgent so it captures attention.
Repeat this when an invoice is one day overdue, and then at regular intervals during the coming weeks. Some accounting packages allow you to send automatic daily reminders. These include platforms like QuickBooks, which can be paired with your Tyl account.
4. Offering multiple ways to pay
When clients don’t pay an invoice, it might be because they are struggling with their own cash flow issues. Or, they’re finding it hard to follow your payment instructions. Offering a range of ways to pay can help to keep clients engaged.
If your client is struggling with online payments, maybe think about what payment methods you offer. Try phone or card machine options, which may make it easier for your clients to pay their invoice.
If your overdue invoice reminder emails don’t get a response, it can be a good idea to pick up the phone. This could kickstart a productive conversation. It might also be that your client is unable to pay the total sum now but will agree to a payment plan.
5. Deciding when to send a ‘next steps’ warning
In the UK, late invoicing rules say that customers must pay you within 30 days of receiving your invoice, or the goods and services they paid for. For this reason, many businesses move to the warning stage once a payment hits this 30-day mark.
The best time to move from reminders to warnings will vary for each business. For example, you may like to give clients a reasonable buffer of 60 or 90 days. Especially if you want to keep relationships strong if payments slip occasionally.
You might like to draft a company-wide late payment warning policy. This can help everyone in your business know when to take things further and keep it consistent across your business.
6. Sending a next steps warning letter
A final warning letter is the first step towards taking action for overdue invoice payments. When you do this, be clear about the next steps you’ll take if payment is not received. You’ll also need to note when these will be actioned.
For instance, you might let your client know that:
- activity has paused on their accounts, so you’ll not deliver any more goods or services to them. This could be either temporarily or indefinitely
- a statutory demand has been served. This gives them 21 days to pay before their company may need to file for bankruptcy or wind up
- you plan to take legal action to recover the debt
- you intend to charge interest on the late payment.
7. Keeping communications professional
When chasing overdue invoices, it’s best to stay cool and professional. This is especially true when you draft a late payment warning letter.
Professionalism means not letting anger or frustration come through in your communications. But there’s more to it than this. You need to include key details and information in every correspondence.
A late invoice reminder or warning letter might need to include details such as:
- your company name and address
- your customer’s name, address and the name of relevant products or projects
- the invoice number(s) the warning relates to
- payment options and instructions
- the total amount owed
- how overdue the invoice is.
8. Escalating to a mediator or debt collection agency
As much as you try, sometimes warnings aren’t taken onboard. You then need to take the steps you said you would.
First of all, you might try mediation. This is when an impartial person acts like a referee. You’ll pay a fee to a civil mediator, who will try to resolve the payment dispute.
There are also private credit controller firms that offer to pursue a ‘programme of contact’ with firms that owe you money. They can help secure compensation for you and interest on unpaid invoices too.
9. Taking legal action
If other measures fail, you can take legal action over unpaid invoices. This involves contacting your local small claims court.
You’ll pay a fee, including for interest on money you’re owed. You might also need to go to a court hearing. Some firms employ a solicitor or barrister to represent them.
The court can then order your client to make a payment. If they fail to do this, the court has other powers. Though each comes with a fee.
These include the power to:
- collect money
- find out what your client can afford
- send in bailiffs.
10. Serving statutory demands
In the UK, serving a statutory demand is one way to take action against a company that owes you debt.
This might be relevant if:
- the sum they owe is large – often worth more than £5,000
- communications have totally broken down.
After 21 days, you’ll be able to start bankruptcy proceedings against the offending business.
Should I charge interest fees for late payments?
By law, you’re allowed to charge interest on unpaid invoices in the UK. Some businesses choose to do this, but others don’t.
Charging late payment interest can be a useful way to reclaim some of the costs related to chasing overdue invoices. It can also help to give clients a financial incentive to pay on time. On the other hand, late payment charges can make relationships more complicated. This is especially true if your client is struggling to pay.
For fairness’ sake, you may decide to add a clause on late payment interest in some client contracts. This way, there are no surprises. This should give an overview of how you’ll calculate interest. Typically, this is equal to statutory interest – 8% plus the current Bank of England base rate.
Preventing late payments in the future
When you run a small business, late payments can create problems over time. If you’ve dealt with unpaid invoices before, it’s worth thinking about updating your policies. This could help to build resilience.
To help prevent late invoice payments, you might:
- Draft clear invoice payment terms: If you don’t have clear invoice payment policies, the first step is to write them up. This helps you to set expectations both internally and externally. Next, communicate these terms to clients. Do this from the outset, and everyone should be on the same page.
- Confirm payment dates with clients: There can be barriers to making paying invoices. Client-side payments, tax deadlines and bills can all make a difference. For you, the end result is a costly late payment. To avoid potential problems, ask clients to confirm whether due dates are manageable.
- Add late payment interest: Late payment interest incentivises early or on-time payments. It also discourages clients from building up excessive debt. Add interest terms to your policy and stick to them.
- Only work with contracted clients: A written contract lets you put invoice payment terms in writing. This includes due dates and interest policies. It can also give you an extra layer of security if a client won’t pay.
- Ask for a deposit or payment upfront: Getting paid before you deliver a product or service is the safest way to avoid late payments. Depending on your industry, this might be standard practice.
- Deliver work on time: Finally, stick to your end of the bargain. This helps to set the tone and prevents extra tension if you start to chase late payments. When you meet your deadlines, others are more likely to do the same.
Managing late invoice payments can be challenging for a small business. From the moment you onboard a client to contacting the courts, there are ways to minimise the impact. With the right steps in place, it’s possible to safeguard your standing.
Unpaid invoices FAQs
Do unpaid invoices count as revenue?
No, unpaid invoices don’t count as revenue for tax purposes in the UK. This is because you haven’t yet received the money owed. So, including unpaid invoices would exaggerate your revenue during the relevant tax year.
Instead, unpaid invoices can count as revenue either on the date the money is paid or received. This might mean it falls into a different tax year.
How do you account for unpaid invoices?
If you’re sure an invoice won’t be paid, it’s possible to write this off as bad debt in your filed accounts. You can often write off unpaid invoices in your accounting software. You can also do this in your Self Assessment tax return.
With the latter, you can sometimes claim the cost back as an expense. This is usually a final option if all others have failed. Or you might not feel it’s worth taking the issue to court.
Do I have to pay VAT on unpaid invoices?
Yes, you have to pay VAT on unpaid invoices in the UK. If you bill a client in the 2023-2024 tax year, but don’t receive payment until 2025, the VAT is due with your 2023-2024 accounts. However, if you write off the invoice as bad debt, you can usually claim VAT relief.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
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