How to deal with unpaid invoices

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Written by Michael Foote , founder of Quote Goat, with over 13 years experience working in the finance, insurance and currency sectors.

With the large majority (78%) of SME’s now waiting over the standard one-month invoice window to receive outstanding invoice payments, are we seeing a problem growing out of control?

It isn’t just the disruption to capital that is affecting these businesses either, it is also putting a strain on time management as it is estimated that on average, businesses are spending up to 2 hours a day chasing these late payments. Time that could be better spent focused on growing the business itself.

As well as being an inconvenience, it can also be detrimental to their very survival. There are certain strategies that SMEs can implement to help address the situation of unpaid invoices:

Procedural follow ups

A lot of small business tend to panic over outstanding invoices, causing them to implement a scatter gun approach to following up with their clients; sending incorrect invoices, not giving clients reasonable time to pay, with some even sending threatening messages.

Instead, every company should have a clearly instructed and implemented procedure for outstanding payments from the date the invoice is issued. Payment terms should be clearly identified within the invoice, including due date of payment. Checks should be made that the right invoices have been sent to the right locations before following up with further requests for payment. Follow up emails should always be polite; they are more likely to ensure payment of the invoice and to maintain a healthy relationship with the client.

Outsourcing credit management

There are certain companies that provide professional services for handling invoices. These are usually sought by companies that lack the necessary in-house experience or are beginning to expand their client base to the point that their invoices are becoming too much to manage themselves.

Discounts and Penalties

A strong tactic for ensuring clients pay their invoices on time is to offer a discount if they pay within a certain amount of time of the due date or even before the date the invoice is due. For example, a 2% discount on an invoice paid within 10 days of issuing will help motivate a client to make a payment within a two-week window, benefitting you and helping them save money.

The opposite end of the spectrum involves issuing penalties. Incentives are generally the most effective way of motivating people but unfortunately it doesn’t work for everyone. By issuing penalties that will see their invoice costs rise if they fail to pay by a certain – yet reasonable – time clients will have to pay more than the initial cost of their bill.

invoice financing or factoring

Lenders now offer the possibility to instantly free up outstanding capital by purchasing your invoices and recouping the funds themselves from the individual businesses or institutions that are currently owing through invoice finance.

This way companies will receive an instant cash injection worth up to 80-90% of the outstanding invoice instantly and removes the need for them to chase up the late payments themselves.

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