Accounting Blog

Accounting Training, Tips, and News

Make sure you are making an effort to collect when a customer won't pay.

What to Do When a Customer Won’t Pay You

Late payments can cause serious cash flow issues for a small business. You can’t afford to wait around for overdue invoices. So, what do you do when a customer won’t pay?

There are several steps you can take to collect late payments. As a small business owner, you know that most customers intend to pay you. But for customers who pay late, try our tips below.

Tips for when a customer won’t pay

If you have a late-paying customer, stay positive and professional as you pursue the payment. Being respectful can make the collection process easier for both you and the customer.

Find out what to do when customers won't pay.

Here are eight tips for when a customer won’t pay:

1. Set up payment terms

To get paid on time, start out on the right foot. Prompt payments begin with establishing payment terms before you perform a service or deliver a good. Payment terms outline your expectations for the customer and the customer’s expectations for you.

Payment terms include:

  • The services or goods being provided
  • The forms of payment you accept
  • Where customers should send the payment
  • Your contact information
  • The payment due date
  • If you enforce late fees or penalties
  • If you offer early payment discounts

For invoice payment terms, you should clearly outline the transaction. Your customer should understand and agree to the terms in writing.

Include the payment terms in the invoice. Send the invoice immediately after completing a service or delivering a good. You can write “invoice enclosed” on the envelope so it doesn’t get tossed aside. If you email the invoice, use the word “invoice” in the subject line.

2. Document the payment process

You need to write down every step of the payment process, from the payment terms to receiving payment. Documents include contracts, invoices, and delivery receipts.

You don’t need a complicated system for tracking payment documents. But, you do want complete records of each transaction. You can keep records on paper and file them. Or, you could use online accounting software to easily send and track invoices to customers.

3. Send payment reminders

After invoicing a customer, send a payment reminder before the due date. A good time to send a reminder is one week before the due date. Include all the information the customer needs to pay you. That way, they can get the payment ready without having to find the original invoice.

4. Contact late payers

If the payment is late, send a collection demand letter. The first letter should provide helpful information about the payment. The customer might have simply forgotten or lost the invoice. The first contact should be a friendly reminder to remit the payment.

With each letter, increase your concern about the payment. You may need to contact the customer by phone, email, or in person.

5. Be professional

No matter what happens with the payment, remain professional. You may be frustrated with the customer, but your business’s reputation is at stake. How you treat the customer could affect your entire brand. Be polite, clear, and understanding when reaching out to late-paying customers.

The Fair Debt Collection Practices Act (FDCPA) sets guidelines for collecting late payments. The Act protects customers’ rights to be treated fairly during debt collection. You could be sued for violating the FDCPA.

6. Establish a payment plan

A customer might not be able to pay the full invoice amount at one time. Instead, it might be easier to pay several installments of the total amount. Make sure you have a written and signed customer bill payment policy before you begin work.

A common payment plan type is a 30/30/40 payment. The customer gives you a 30% deposit of the total bill up front. Halfway through the project, you collect another 30% of the bill. When you complete the project, you collect the final 40% of the total amount due. You can make payment adjustments for your customer throughout the project.

7. Hire outside help

If you cannot collect the money yourself, you may need to recruit professionals to help with invoice collections. A collection agency will pursue the customer’s payment for you. You will owe a portion of the customer’s payment to the collection agency.

Collection agencies recover more than $50 billion a year for U.S. organizations.

You can also hire a lawyer to help you collect the payment. Before hiring a professional, be sure the cost is worth it. If the amount owed to you is small, you might want to handle the late payment yourself.

It may be cheaper to file a suit in a small claims court. You don’t need to hire a lawyer for a small claims court. Make sure the customer lives near you because you have to go to court where the customer is located.

8. Know when it’s time to quit

Sometimes, pursuing a late payment is no longer worth it. Know when it’s time to let the payment go. Decide if your efforts to collect the money are costing you more than the amount owed. You don’t want to end up without the payment amount plus owing a ton for your collection efforts.

Do you need an easy way to track your invoices? Patriot’s online accounting software lets you create invoices, track money owed to you, and record payments. And, we offer free, U.S.-based support. Try it for free today.

Comments are closed.

See for yourself how easy our accounting software is to use!

Tired of overpaying for accounting software? Save money and don’t sacrifice features you need for your business.

Start My Free Trial

Or you can EXPLORE THE DEMO!