Unpaid Overdue Payments: Collecting the Uncollectible

Author: Larry Chester, President

There is one thing that causes every business owner to grimace.  You sent an invoice to ABC company, that they are not paying.  It suddenly becomes problematic.  You used to just ignore it along with the other invoices that are just being paid late, but this one can’t be ignored any longer.  It’s now 90 days past due and they’re not returning phone calls or responding to emails.  This might be a total loss. Unpaid overdue payments pose a risk to work, and aren’t always easy to resolve neatly.

Here are some approaches that you can use to try to resolve the situation of unpaid overdue payments.  None of these are guaranteed, but each is another attempt to right the wrong.

Preplanning is the best defense against unpaid overdue payments

Establish a solid credit policy and stick to it.  Here is a blog I wrote some time ago about establishing a credit policy.  https://bit.ly/CFOSLoan

• Communicate with your client – It’s important that you make sure that your customer knows that you are expecting payment according to your agreed to terms.  On large invoices, reach out before the payment is expected, and ask them when they are planning on paying the upcoming invoice.  Get ahead of the game, and make sure that there aren’t any issues that need resolving.
• Send out statements – Most software programs allow you to easily and quickly print statements to send to your customers.  It’s a good reminder, and will list each open invoice.  This allows the customer to match their records to yours.  Some companies use stickers on the statements to bring attention to past due balances.
• Send out reminder emails – If the payment is really late, it’s time to move up the chain of command.  Send an email to the accounts payable department, but copy the President of the company.  Or, send out an email to the President of the company, and copy the accounts payable department.  It depends on how aggressive you want to appear.  Copying the CEO is a softer touch than sending the CEO an email directly.  You may be more effective by sending out emails with the oldest invoices attached.  It has greater impact than a statement.
• Make that phone call – You may not want to make the call, but It can be hard to ignore a phone call.  The squeaky wheel gets the grease.  But you can still take the soft approach.  Sometimes they’re not trying to avoid you, they’re just busy, or they procrastinated on making that payment.  Take the soft approach, even at this point.  They may be as embarrassed as you are annoyed.
• Follow-up – If they said that they were going to pay you on Friday, and by Wednesday of the next week you still don’t have it, don’t be shy about calling them to see when they sent the payment.
• Shift to ACH payments – Now that banking has gone more fully electronic, get your payments by ACH.  That’s a direct bank to bank transaction. It happens in 24 hours, and there are no delays.  No stamps required, no mailman, no snail mail.  They send it – you get it.
• Get Progress Payments – If they tell you that they’re short on money and can’t pay it now, take a smaller amount.  At least you’re getting something, and each small payment that they make makes it easier to pay the rest, and reduces your outstanding balance.  Divide it into 4 equal payments, with each one at two-week intervals, or 8 equal but smaller payments at weekly intervals.
• Require payment on current invoices – Insist on payments for recent invoices, with partial payments each week for the old invoices.  Let them build a habit of paying you weekly for current work, while eating away at the old payments.
• Hold off on future shipments – this can be risky, because it’s easier to collect from someone that you have a continuing relationship with.  If you stop shipping to them, what incentive do they have to pay you?  But if you keep shipping to them you might just allow them to dig a bigger hole.
• Require COD payments – for all future shipments or services, and require that they partially pay old invoices at the same time.  You continue working with the client, and you are working down the old receivable.  Two good things.
• Hire a collection agency – They are built for collections.  They have the manpower and the experience to be a real pain in the neck.  But if they’re good, they will be such a pain in the neck that you might just get paid.  But the older the invoice, the more they’re going to charge.  It could cost you anywhere from 25% to 75% of the outstanding bill.  But at least you’ll get something.
• Use a collection attorney – An attorney will write a letter to the business, and likely will end up threatening legal action to collect.  Be aware that this is a threat, and if you aren’t going to follow through on the threat, then why make it?  If you go through with legal action, it will be expensive, will take a long time, will sever your relationship with the customer.  And, the decision to do that will likely be the result of emotion.  It can become vindictive, and take you down the rabbit hole.

Worrying about collecting a bad debt is difficult. You have two choices, either chase it or write it off. Protecting yourself with good business practices when you start your working relationship with a new customer, especially when it comes to unpaid overdue payments. But in the end, it’s going to be your client’s ability to pay, and their willingness to work with you that will make the difference. Sometimes, losing a bad client isn’t the worst alternative. It might be the safest one.