Best Guide to Unpaid Invoices in 2024

Invoices are the lifeblood of all B2B businesses. And in an ideal world, you’d never have to worry about getting paid. Unfortunately, that’s not the world we live in, and unpaid invoices are a common problem for companies of all sizes.

Today, we’re here to help you overcome that problem. In this article, we’ll discuss all the variations of unpaid invoices – what they are, their effects, and how to move past them and get your money from late payers. 

What Does an Unpaid Invoice Mean?

An unpaid invoice is an invoice that hasn’t been paid yet. Pretty straightforward, right? However, there’s more to it than that. As you know, every invoice you send or receive has an issue and a due date, which outline the timeframe during which it has to be paid.

This varies from one invoice to another because each document can have different payment terms, such as Net 30, MFI 15, and CND, just to name a few. You can learn more about these in our article on Understanding Invoice Payment Terms & Conditions article.

Unless your T&Cs state otherwise, the common law across most jurisdictions is that you can apply late fees 30 days after the due date. Do bear in mind that in most cases, if you fail to seek reimbursement within 6 years, the invoice and its payment are voided. 

However, the one thing that remains the same for all invoices is the document’s lifecycle. And that closely relates to the phrases we’ll discuss today, so let’s answer…

What Types of Unpaid Invoices Exist?

The process begins with you creating an invoice and sending it to your client. At this point, you can consider it to be open or outstanding. An outstanding invoice is one that still has time before the due date but hasn’t been paid yet.

The invoice becomes paid or finalized if you get your money by the due date. However, when that doesn’t happen, it becomes an unpaid, overdue, late, or past-due invoice.

These terms mean the same thing – the invoice hasn’t been paid and is past its due date. This turns the customer into a late-payer (or potentially non-payer) and makes your life much less fun because you must start chasing payments. But…

Why Are Unpaid Invoices Bad For Business?

Because you don’t get paid, duh! But despite how obvious that answer may seem, that’s not where the negative effects of overdue invoices end. Other implications of unpaid invoices include: 

• Reduced Growth Opportunities: Did you know a mid-sized company is, on average, owed $300,000? 89% of businesses cite these late payments as a major limitation on their growth, particularly regarding hiring, restocking, and marketing.
• Crippled Revenue Stream: The negative cash flow has an even more pronounced effect on SMBs, which aren’t able to counteract the late payments. This often leads to downsizing and is the reason for 90% of SMB bankruptcies.
• Additional Administrative Tasks: Chasing down late payments is a lot of work, requiring constant follow-up emails, updating invoices with late fees, issuing lawsuits, etc. On average, the additional admin costs companies 14 hours per week.
• Stress & Anxiety: Companies are only as good as those working there. If you and your employees suffer from the constant pressure of unpaid invoices, it’ll surely reflect your professional and personal life and health.

How to Handle Unpaid Invoices Effectively?

Thankfully, businesses aren’t completely helpless when dealing with late payers. The options available to you largely depend on the deal’s and invoice’s status, so here’s a quick breakdown to help you navigate your situation.

• Cancel The Invoice

If you’ve already invoiced your client and they let you know they won’t pay, but you haven’t yet delivered the product or service, you can cancel it with a credit note. This is the best-case scenario, as you don’t lose any money.

Credit notes/memos are financial documents that allow you to lower a client’s payment or cancel it outright by issuing a note of the same value as the invoice. You can create one quickly and easily for free with the Credit Note Generator.

• Write The Invoice Off

If you’ve already delivered the products/services promised and the client won’t pay, you have to decide whether you want to pursue the issue or let it go. This largely depends on the amount owed. 

As explained above, chasing down non-payers is usually time-consuming and can become quite expensive if you have to hire a debt collector or take it to court. So, if the invoice was relatively low, eating the cost may be cheaper. 

• Email The Client

If you decide to chase the late payer, it’s always best to start by emailing them. Sometimes, people forget, or invoices get lost in the never-ending stream of messages. With a bit of luck, that’ll be your case, too.

We’ll show you how to write an effective follow-up email for unpaid invoices in the next section, so keep on reading to learn more about that. 

• Hire A Collection Agency

If the client ignores your gentle attempts to get your money, you may seek a more persuasive option. In this case, you can hire a collection agency to chase the late payer.

One thing to remember with this is that although it’ll save you some time and almost certainly get you your money, the agency will likely take a percentage of the invoice as payment for their services.

• Seek Legal Action

In the worst-case scenario, you may need to take legal action against your client. This should not be taken lightly, as submitting a claim can be quite time-consuming and expensive.

Furthermore, each industry is subject to slightly different litigation, so it’s best to consult an attorney before submitting a claim or filing a lawsuit. 

• Sell The Unpaid Invoice

Finally, if you need money fast and want to wipe your hands off the whole situation even faster, you may want to consider working with an invoice factoring company.

These companies buy overdue invoices at a discount and then work with the late payers to recoup the finances. However, they may charge significant fees for the service, so it’s best to consult an Invoice Factoring Calculator first.

How To Track An Unpaid Invoice?

So, we’ve discussed the things you can do to recoup your losses from a past-due invoice. But what’s the actual process behind that? We’ll answer that in this section.

1. Identify Overdue Invoices

While SMBs may easily identify late payers, companies that issue multiple invoices each month may not. And if you don’t have an Invoicing Software Solution to keep track of it all, you may need to do it yourself.

For that reason, it’s a good idea to schedule a day each month to go over the status of all your invoices from previous months to ensure everything’s in order. And if it’s not, it’s time to kick off the collection process.

2. Send A Gentle Reminder

As mentioned in the previous section, the best way to kick off the collection process is with a friendly email. After all, accidents and mistakes happen – we’re all human. However, if they don’t respond, that might tip you off to something being wrong.

Ideally, you’re looking to send multiple emails throughout the process at regular intervals to make absolutely certain they’re not being missed, as well as combine them with some of the other strategies featured in this section.

Now, let’s take a look at a few of the emails you might send to a late payer.

EMAIL 1: 

• 2 Business Days After Due Date

At this point, you should have either received the payment or a message that the money’s coming. If neither has happened, you’ll want to draft a message similar to this:

Subject:
[Company Name]: $[Overdue Amount] Overdue for [Customer Name]

Body: 
Dear [Contact Name], 
I hope you’re well! 

I’m reaching out regarding your outstanding account balance, which currently stands at $[Overdue Amount]. I’m attaching a list of invoice references and PDFs, which are now overdue. 
I would appreciate a swift payment upon receipt of this email to get the situation resolved as quickly as possible.
If you’ve already sent payment, please disregard this email.

All the best,
[Name].

EMAIL 2: 

• 8 Business Days After Due Date

In the case of most forgotten invoices, you’ll hear back from your client after the first email. If that has not happened, it’s not a good sign, but still might not be anything bad. It’s best to try again with a stronger subject and content.

Subject:
Reminder: Your Company, [Customer Name], is Overdue for $[Overdue Amount] to [Company Name]

Body: 
Dear [Contact Name], 
I’m following up on my last email regarding an overdue invoice we’re still expecting payment for.

Please bear in mind that the Invoice [Invoice Number] was due to be paid on [Invoice Due Date].
Your current account balance now stands at $[Account Balance], $[Overdue Amount] of which are overdue. 
Please get back to me as soon as possible regarding when we can expect payment.
If you’ve already sent payment, please disregard this email.

Sincerely,
[Name].

EMAIL 3: 

• 14 – 21 Business Days After Due Date

If the client still has not responded to your emails, you’ll want to start reaching out via other communication channels on top of sending accompanying emails. 

We’ll discuss other forms of contact in the next point of our list of strategies for collecting debts. For now, here’s a template for your email at this point in time- 

Subject:
URGENT [Company Name]: Your Company, [Customer Name], is Overdue for $[Overdue Amount]
CC: 
[Company Owner], [Direct Supervisor], Accounting Team

Body: 
Dear [Contact Name], 
Despite our previous attempts on [List of Dates] to collect overdue payments of $[Overdue Amount], we’ve yet to receive payment from you.

Please note that the Invoice [Invoice Number] was due to be paid on [Invoice Due Date], and your outstanding account balance is now at $[Outstanding Balance].
I urge you to confirm the status of the payment as soon as possible. Otherwise, we’ll be forced to apply late fees and consider taking legal action.
You’ll find the relevant invoice references and PDFs attached.

[Name]. 

EMAIL 4: 

• 28 Business Days After Due Date

Nearly one month after the due date, you can be pretty certain something bad’s going on. That’s why we recommend supplementing this email with a physical letter delivered to the client’s office.

While this is seldom done nowadays outside of collection agencies, it’ll show that you’re willing to go the extra mile to get paid what you’re owed. Remember to print and attach your invoices for clarity.

Subject:
FINAL WARNING [Company Name]: Overdue Payment of $[Overdue Amount]

CC: 
[Company Owner], [Direct Supervisor], Accounting Team

Body: 
Dear Sir or Madam,
We’ve made multiple attempts to collect payment for your overdue invoice [Invoice Number] on [List of Dates]. You’ll find all of the relevant references and PDFs attached.

As you’ve so far not responded nor provided payment for your outstanding account balance of $[Account Balance], we’re issuing this final warning.
If you do not provide payment within the 14 days following the delivery of this email and its associated letter dispatched to your offices, we will apply late fees per our T&Cs and seek repayment via legal action. 
I urge you to confirm the status of the payment as soon as possible.

Regards,
[Name].

3. Send An Updated Invoice

One excuse businesses often hear is that the client had misplaced the invoice in question and had simply forgotten. 

While this may be true, it’s best to prevent this altogether by sending an updated invoice 1-2 days before the due date and attaching it to all your overdue communications. 

4. Consider Other Communication Channels.

The most effective way of getting a client’s attention is to not give them any opportunity to miss or actively avoid your contact attempts. To that end, here is a list of alternative communication channels to leverage throughout your efforts.

• Phone Call

Usually best used during the first 1-2 weeks after the due date, as beyond that, it’s likely the client is actively avoiding you. Call your contact directly to discuss any issues they may be facing and the payment date.

• SMS

Use 1-2 weeks after the due date, along with phone calls. Send a polite and concise follow-up message, reminding the client about the overdue payment and emphasizing the importance of prompt resolution.

• Direct Social Media Message

If you have your direct contact in your network on LinkedIn or another SM platform, you can use this approach throughout the entire collection process. Use it as a follow-up to all contact attempts.

• Negotiation Meeting

If the client is willing to discuss repayment but simply has financial (or other) issues preventing them from doing so, you can schedule a conference call anytime throughout the collection process to resolve the issue.

• Collection Agency Notice

Send a notice informing the client that their overdue account has been forwarded to a collections agency within 4-6 weeks following the due date. This may impact their credit score, and as such, can be very effective.

• Legal Notice

If all previous attempts fail, consult with a legal professional to send a formal legal notice within 6-8 weeks following the due date. Indicate the intention to pursue legal action if the payment is not settled within a specified time.

5. Explore Repayment Options

If the client doesn’t have the financial means to pay you in full but is forthcoming enough to admit it, you may consider alternative repayment options, such as a payment plan of multiple investments across 3, 6, 12, or 18 months.

A good approach is to have the client pay whatever they are able and then stretch the rest across a manageable timeframe.

6. Start Charging Interest And Late Fees

As stated earlier in the article, you can start charging late fees whenever your T&Cs say so (ideally, you’ll want to have communicated this before the start of the deal) or 30 days following the due date.

Remember that your/the client’s jurisdiction may have different legislation, so be sure to research them before taking this step. You’ll also have to take action within 6 years of issuing the invoice, or it becomes void. 

7. Take Serious Action

If nothing else works, then you’ve only got one option – bring the hammer down. Review the previous section to consider which collection strategy may work best for your situation. 

How can you Calculate the Interest on an Unpaid Invoice?

To calculate interest on an unpaid invoice, you can use the interest calculator provided by the Small Business Commissioner. Follow these steps:

• Input the due date of the invoice.
• Specify if you have contracted payment terms.
• Enter the contracted payment days from the date of the invoice.
• Provide the date of the invoice.
• If the invoice is overdue and has been paid, enter the date of payment.
• Input the invoice value, including any VAT.
• The calculator will determine the days overdue, interest due, compensation, and the total amount owed on the invoice, including interest and compensation.
• You can then raise a separate invoice to claim late payment interest and compensation as legally entitled.

How To Prevent Unpaid Invoices?

The age-old medical adage that prevention is the best treatment also applies to combating overdue invoices. It’s unlikely that you’ll never have to deal with a late payer, but the fewer you do, the better it is for your bottom line and mental health.

Here are a few ways to help avoid late invoices:

• Know Your Customer: One way to ensure your clients pay what they owe is to foster positive, long-lasting relationships with them. People are much less likely to betray someone they see as a friend, after all.
  

• Draft Clear Terms & Conditions: Another great way to combat non-payers is to write clear T&Cs and discuss them with the customer before each deal. Make sure to include specific due dates, accepted forms of payment, and late fees.
  

• Invoice Quickly: If you don’t want to risk your invoices getting lost in the customer’s piles of paperwork, you should always try to send an invoice as soon as the deal’s finished. That way, the obligation to pay is always top-of-mind.
  With the free invoice generator, you can effortlessly create and dispatch invoices in a swift and straightforward manner.
  

• Communicate Due Dates: As mentioned earlier, prevention is often the best treatment. Stay ahead of potential issues by sending a friendly reminder ahead of the due date via email/SMS/DM to ensure the customer doesn’t forget.
  

• Collect Payment Upfront: Another way to incentivize payment (or at least recoup some of your potential losses) is to charge upfront. Some of the T&Cs you can use for this purpose include 50% Upfront, CWO, or even Stage Payments.

• Offer Multiple Payment Options: Removing obstacles is one of the best approaches to get people to do what you want them to. Some of the options you can offer include cash, debit, credit, Google/Apple Pay, bank transfer, and even crypto.
• Give Early Payment Discounts(?): This is a hotly debated topic and may not pay off if you a) give too big of a discount, or b) don’t communicate the terms clearly.
  However, it can be a great incentive if done right.
  For example, consider offering a 2% discount, if the customer pays 10 days in advance of the due date (2/10 net 30).

4 most common Issues with Unpaid Invoices

Some businesses still rely on old-fashioned paper accounting methods, which, though slower than modern apps, can be effective if managed properly.

However, digital accounting software and invoicing apps can greatly reduce payment delays by simplifying the invoicing process. Yet, businesses must ensure they use these tools effectively to reap the benefits. Often, invoicing issues arise from a lack of expertise within the company, especially as the business expands and billing becomes more complex.

1. Poor Accounting Systems

Whether the accounting system uses traditional processes or modern technology, those administering them must manage them properly. To be efficient and productive, the owner or staff should research and apply best practices and follow them rigorously, including accurate, comprehensive, and legible record-keeping on professional templates and other resources.

2. Disorganized Invoicing

This problem may seem similar to that of poor accounting, but it involves wider issues.  Inadequate accounting can prevent an invoice from getting paid.

Dysfunctional billing could result in the bill never going out in the first place. It could also result in errors that reflect poorly on a business’s professional reputation or, even worse, result in the invoice not holding up in a court dispute.

3. Technology Struggles

Problems do not only occur when businesses stick to the tried and true paper-based systems. When companies make the decision to modernize, they should be careful of which invoicing system they select.

The wrong invoicing systems can bring a number of problems, including, but not limited to:

• Overly restrictive caps on use
• Unnecessarily complicated design or function
• Poor tech support
• Inability to use in remote areas without cell service
• No way to process payments automatically directly from a credit or debit card
• Wrong features or functions for business needs
• Overpromises and underdelivers

While the right mobile invoicing app can serve as a huge boost to bill collection needs, the wrong one can frustrate and confuse.

4. Poor Communication

Poor communication between the company and customer can hinder invoicing and payment processes. It’s crucial to have clear agreements documented from the start, accurately reflected in invoices.

Lack of communication about payment expectations and charges can lead to confusion and even legal issues for debtors. Invoices should also specify a clear payment timeframe, typically 30 to 45 days, sometimes extending to 90 days.

Best advice for dealing with customer problems

More often than not, the onus of payment issues involves issues with the business patron more than in-house problems.  Sometimes due to financial problems, but other times because of unethical practices, businesses will resist paying some or all of the bill as long as possible.

Non-diversified Client or Customer Base

Businesses of all levels should have a diversified customer or client base. Experts say that, between the two options, it’s better to earn a smaller sum serving multiple patrons than a single large account.

When a single client has problems, it can ruin a small business.

While many associate non-payment of bills with smaller and less professionally run companies, in many cases the major clients and customers often cause the most problems. Whether it’s a billionaire engaging in slow-walking payments, or the government itself struggling to fulfill responsibilities, overreliance on a single or small number of patrons can be devastating.

Know When to Be Diplomatic and When to Be More Forceful

When a patron obviously has either decided to resist payment or has grown unable to meet responsibilities, a business needs to explore options before taking the patron to court. Which approach to take, frankly, depends on the leverage the business has over the client or customer.

Too many times, such as in the case of businesses relying heavily on one or two major clients, the business itself may have little leverage. This is especially true with contractors who offer general services easily obtainable elsewhere.

In other cases, a business may have more leverage to extract the agreed-upon payment. When a vendor offers a specialized service not easily found elsewhere, but vital to the debtor, a threat to discontinue service could be effective.

Requesting All or Some Payment in Advance

Many companies do this as a matter of course with all clients. Making an arrangement along these lines protects the vendor at the front end and the customer or client at the back end of the transaction.

If the customer or client defaults on the rest of the bill, at least the vendor recoups some of the cost of doing business. Thus, this approach does not help with minimizing the number of unpaid invoices but reduces the total amount owed. The client also retains leverage against the vendor to ensure that the job gets done as contracted.

Pursuing Legal Options

When pursuing payment, suing the customer or client should remain the last resort. It should only serve as a viable option when all other avenues of effort have been exhausted.

Suing the client in most cases causes an irreparable breach, even when the patron is in the wrong.

Lawsuits can also open the door to the public gaining restricted information about the company through the discovery process and trial revelations.

Using Factoring Services

Factoring services offer small businesses a quick solution to recover most of the money owed by selling unpaid invoices at a discount, typically between 80 and 95 percent of the total. The factoring company then handles collections, remitting the remaining percentage to the original company, minus fees. However, aggressive collection practices by the factoring firm can strain the business relationship.

Whether opting for a factoring service or not, maintaining modern and effective invoicing practices remains crucial for debt collection efficiency.

How Billdu Can Help With Late And Unpaid Invoices

As you’ve seen throughout this article, chasing down payments is often a time-consuming and troublesome affair. So, why not make your life a bit easier with an Invoicing App that’ll do most of the leg-work for you?

Beyond the ability to create every type of professional financial document including invoices, estimates, quotes, and more in just a few clicks, Billdu comes with a bundle of powerful features.

First and foremost, it allows you to get a comprehensive overview of invoice status at a glance, send automatic reminders to clients, and request late payments right from the app itself.

Or, y’know, you could just invite your accountant and let them do it for you.

Discover all the ways a powerful invoicing solution can supercharge your finances, now for 30 days completely free with a trial for any of Billdu’s Pricing Plans!