How to Handle Unpaid Invoices (Steps & Prevention)

Learn what kind of impact late or unpaid invoices can have on your small business and how you can prevent them from piling up.

Updated: February 12, 2024
Matt Crabtree

Written By

Matt Crabtree

 

Generally speaking, unpaid invoices are something that can leave an impact on any size of business, but it's definitely something that can affect smaller businesses in particular — given that there are usually far fewer clients available to make up the deficit.

If you are in the latter category, however, you'll definitely find that there's a chance your cash flow is knocked once a major client or two is late on their payments, and you soon find yourself unable to pay for basic business expenses like employee wages or simply just utility bills — potentially leading to serious financial consequences or even liquidation further down the line.

Having said this, there are still steps that you're able to take in order to address any unpaid invoices you might have. So, throughout this article, we're going to take a closer look at what kind of impact delayed invoices can have on your business and, most importantly, how to prevent them from becoming a recurring issue.

Understanding the Impact of Unpaid Invoices

Kicking things off, it's fairly crucial to know what kind of impact unpaid invoices can actually have on your business, because the weight of them can often go slightly underappreciated while your cash flow is good and you don't have any worries regarding how you're going to pay the bills.

Put simply, unpaid invoices not only disrupt cash flow but generally lead to plenty of other costs, too — something that's obviously going to hurt your bottom line when you're working with limited resources in the first place, not to mention how much of a waste of time the whole ordeal is.

For instance, some of these extra costs include things like increased debt recovery costs, late commercial payments, and even legal action via court proceedings, so it's crucial to stay on top of this.

Prevention Is Key

Ultimately, it should go without saying that the best way to deal with unpaid invoices is simply just to prevent them from occurring in the first place — meaning you've got to establish clear payment terms upfront and make sure that all of your clients know what kind of obligations they have when it comes to payments.

Remember to include things like due dates, late payment penalties, and even any claim interest that might apply when you're writing contracts or sending invoices.

Furthermore, another one of the most proactive measures you can take is to conduct credit checks on any potential new clients before you enter into any agreements with them. So, now that you've got an idea of their financial stability and payment history, you can identify possible red flags and avoid doing business with clients who might have a track record of late payments or financial instability. 

Steps for Handling Unpaid Invoices

Obviously, it's easier said than done to simply prevent ever having to deal with unpaid invoices entirely, so if you ever find that you're in this kind of situation, you'll need to take action as quickly as possible if you want to minimise the impact it will have on your business.

So, throughout this next section, we'll look at a few ways you can handle an unpaid invoice effectively:

Send Reminders

Firstly, you'll always want to begin as politely as possible with a simple reminder to the client to let them know that the payment is overdue. More often than not, late payments might be nothing more than a mere oversight, so you'd naturally want to ensure this isn't the case before going in gung-ho and threatening to enforce legal action.

Just let them know what kind of consequences are going to come their way if they continue to delay their payment, including things like claim interest and late payment penalties being applied (presuming you've outlined this prior in the payment terms you've both agreed upon).

Follow Up With Phone Calls

It would be nice if a simple reminder was all it took to resolve unpaid invoices, but the reality is that your follow-up requests can often go unanswered, meaning it's probably best to take a more direct approach and actually contact them over the phone to discuss the client's outstanding invoice.

Now, it's worth adopting the same relaxed mindset going into this phone call as you did for the previous step, as there's still every chance that your client has innocently forgotten or has a legitimate excuse — the last thing you'd want to do is spoil an otherwise good relationship over an issue that turned out to be nothing.

Just try to keep a professional and polite tone while you're on the phone with them, but remember to stay firm in your request and don't let them forget the consequences.

Fortunately, most disputes or misunderstandings with unpaid invoices can be dealt with after a personal touch like a phone call, so this should hopefully be the final step for many people reading currently.

Seek Assistance From Debt Collection Agencies

Finally, if you feel as though pursuing legal action on your own might sound a bit too daunting or simply just too impractical, you've always got the option of enlisting the help of a professional debt collection agency.

In essence, these are companies that specialise entirely in recovering unpaid debts — meaning they've got all the resources and expertise to deal with them on your behalf. Of course, they're still going to charge a fee for their services, but outsourcing your debt collection can definitely save you a lot of time and effort, not to mention increase your overall likelihood of recovering the money.

Related Guides:

How to Handle Unpaid Invoices: FAQs

Can I Recover Debt Recovery Costs Incurred During the Pursuit of Unpaid Invoices?

Can I Recover Unpaid Invoices Through a Court Claim?

Can I Include Clauses in My Contracts to Protect Against Non-Payment of Invoices?

How Can I Leverage Technology to Prevent and Address Unpaid Invoices?

What Steps Should I Take to Recover Unpaid Invoices From Clients Who Are No Longer in Business?

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