The art of getting paid: How to recover unpaid invoices
Never has it been more important to ensure you get paid for your work. Inflationary pressures and whispers of a potential recession on the horizon make for a gloomy economic outlook with even more belt-tightening in store. With the chances of buyer’s remorse high, you’ll want to read our guide below on how to recover unpaid invoices and what you can do to prevent issues from occurring in the first place.
In this article, we will cover the following:
How to recover unpaid invoices
How to avoid problems in the future
If you are looking to recover unpaid invoices, take a look at this template:
If you don’t already have an agreement in place to protect you against missed or late payments, our templates are linked below:
What to do if someone owes you money
The first step to recovering outstanding invoices is often as simple as picking up the phone and having a direct conversation. It might feel a bit awkward at the time, and you may feel like it could jeopardise your relationship with a client, but often clarifying what’s going on can strengthen a relationship. The polite version of ‘Hey, how about that bill?’ can work wonders! Nine times out of ten, you’ll probably develop a greater rapport with the client and get more work out of it. It might be a simple case of the accounts' person being on leave and your client not even realising that the invoice had been overlooked.
Ideally, you don’t want unpaid invoices to drag on for months on end. Anything longer than an invoice overdue by 30-90 days can become a real problem.
Unpaid invoice recovery
So, what should you do after you have exhausted gentle email reminders and have called the client directly? Is it time to pull out the big guns and send in a debt recovery person? Do you engage a lawyer and take the matter to Court? Before jumping ahead, your next step is to weigh up the size of the debt against the amount of time and energy involved in recovering the money owed to you and decide whether it is commercial to proceed with recovering it. While the “principle” of the matter may be well and good, you don’t want to spend a thousand dollars chasing a hundred dollars, so try to be objective.
It’s important to remain aware that unpaid invoice recovery still has an opportunity cost. At the very least, will you be able to break even in the cost of recovering the debt? Are you willing, on principle, to spend hours and hours trying to recover debt when you could have been doing other work? There are some cases where you may even decide to wear the cost and write it off, as much as that hurts at the time.
If the debt you are trying to recover is significant (greater than $5,000) it may be worth engaging a lawyer and taking the case to court, (in New South Wales this is the Small Claims Division) or start a debt dispute with your state or territory's Civil and Administrative Tribunal (NCAT in NSW).
How to recover unpaid invoices with a letter of demand
If you are chasing an invoice of less than $5000, sending a letter of demand can be a useful intermediate course of action. A letter of demand can be an affordable yet effective early action, particularly if sent between 30-90 days after an invoice is due.
We always recommend you request the total amount owing in a letter of demand. If a client returns with an instalment plan or an offer to pay a discounted amount (and you agree to it), you must document it in writing. Then, if the client defaults again on your modified instalment plan, you can issue another letter of demand to revert to the recovery of the original debt in full.
While going to Court may be a last resort, attaching draft court proceedings with the letter of demand can be a good way to show you are serious. Seeing the interest charges, Court costs and filing fees in black and white and feeling the terror of being sued can often coax clients out of the woodwork to settle their fees in a much more prompt way. And, if you end up in Court after exhausting all these methods, you’ll be able to prove through a legitimate invoice, the letter of demand, and draft proceedings, that you have made every effort to recover the funds before you started court proceedings and haven’t been successful.
How to avoid late payments
Making payments easy
How do you make online payment processes so seamless that even overburdened clients won’t be inclined to put your invoice in the too-hard basket?
Ensure invoices are issued on time;
Use automated reminders, or have a bookkeeper or someone on your team responsible for sending out reminders;
Send out weekly statements if necessary;
Make use of ‘pay now’ buttons on outgoing invoices; and
Have a separate email from accounts (even if you are a team of one, “Dave” from accounts can be a great way to take the pressure off you as a solopreneur when it comes to recovering money).
The benefit of a comprehensive Agreement
If you feel like you are forever chasing overdue invoices, had a client back out of a contract early, or had a customer make a late refund request, the chances are your Client or Service Agreement could use a tune-up.
In business, as in life, the best way to avoid late or non-payment is to set clear expectations from day one.
A Service Agreement or Client Agreement is a bit like a prenuptial agreement for online businesses and their clients and/or customers! Not only will your Agreement give you more confidence that you will actually be paid for your work, but it will protect you from being blindsided by clients renegotiating or customers changing their minds about a service at the last minute.
Three essential elements to include in your Client Agreement
As well as protecting your brand and regulating the scope of a project, a Client Agreement should include:
Payment terms (how and when you’ll be paid)
Default interest for late payments
Termination or suspension of a contract in the event of non-payment where your services or products are ongoing
In an ideal world, your Client Agreement would require pre-payment before work commences. Alternatively, you could agree on an instalment plan where, for example, you receive 50% upfront and 50% when you deliver.
A Client Agreement should aim to limit the impact of any debt as soon as a problem arises. You can be completely open and transparent with a client from the start about late payment fees and/or your right to pause a project or service until the final instalment is received. Keep in mind, though, that some products and services are easier to withhold value than others. For example, if you are building a website, you can control it and shut it down if a client doesn’t pay you, but many people don’t have that luxury.
However, we understand that sometimes even the best-laid plans can go awry. That’s where our letter of demand template comes to the rescue when you feel at a dead end trying to figure out how to recover unpaid invoices. Our template has all the lawyer language without the lawyer costs.
If you don’t have a Service Agreement or Client Agreement, or your current agreement needs updating because you have changed your services or the way your team operates, don’t hesitate to reach out to our team to discuss any questions you might have. Be sure to also check out our ready-to-use templates in our shop:
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Have more questions? Find out how to resolve ongoing unpaid invoice recovery issues and improve your payment success rate with a Service Agreement or Client Agreement that is the right fit for your business by contacting me or scheduling a discovery call.