- Overdue invoices are a source of stress for many business owners, affecting cash flow and the ability to meet financial responsibilities.
- Not all overdue invoices are due to a dispute or a customer in financial trouble. Many invoices become overdue simply because a customer has forgotten to pay or is confused by an administrative process.
- Businesses can take steps to reduce overdue invoices and claim back owed payments. From late fees and legal action to better processes and insurance, there are ways to prevent overdue payments harming a business’ bottom line.
Over half of SMEs in the UK report that they still have unpaid invoices from the previous tax year (2022/23). Outstanding invoices can have knock-on effects for your business’ finances. Dealing with late payments requires rounds of time-consuming chasing from finance and credit control teams. As a result, many companies want to protect themselves from overdue invoices.
What are the risks of overdue invoices, and why do invoices go unpaid?
Unpaid or overdue invoices can impact your business with challenges that include:
- Cash flow problems – especially if you can’t rely on a large cash reserve
- Damaged customer relationships – particularly in the case of repeat offenders
- Reputational damage – if your cash flow issues stop you from paying your own suppliers
- Legal consequences – including time-consuming and expensive proceedings
With such clear consequences, you may think a customer wouldn’t pay on time because they’re in dispute with your business or under financial pressure. A customer without the money to pay your invoice will have no other choice than to pay late (or not at all), while a customer unhappy with your service may not wish to pay until their issue is solved. However, another common reason is simple forgetfulness.
Can a better process solve your overdue invoice problem?
If a customer forgets to pay your invoice, the root cause is likely their record keeping process. While this is something you won’t have control over, there are several actions you can take to ensure you’re more likely to be paid on time.
- Carry out checks: Assessing your customer’s finances, checking to see if they are signatories of the prompt payment code, and examining their payment terms will give be a good indicator of whether you can trust them to pay on time.
- Clarify your process: Be clear to your customer about your payment terms and when they can expect an invoice. If a customer expects to be billed on completion of a job and given payment terms of 60 days, a 30-day invoice arriving the day work starts is unlikely to be paid on time.
- Automate reminders: Most invoicing software will send automatic reminders when an invoice is about to go past due.
What if an invoice remains overdue?
After implementing a more effective invoicing process, you might continue to see more overdue invoices than expected. If this is the case, speaking to your customers is the most important thing you can do.
If a customer is under financial pressure, or has an issue with your service, an honest conversation is more likely to resolve matters than escalation.
Start with a friendly, informal reminder, such as a phone call a day or two after the invoice was due. After that, a formal written reminder, then a second reminder indicating a charge of the standard UK late payment fee.
Offering to waive this fee in exchange for immediate payment can often lead to a prompt resolution. But if this approach fails, you may also consider seeking legal advice or hiring a debt collection agency.
Protecting yourself from overdue invoices
All these actions – reminders, legal action, late fees – are retroactive. But you can also take proactive measures to ensure you receive on-time invoices. Streamlining your overdue invoice processes and being clear on payment terms and expectations will help, as will offering flexible payment options.
But you can also consider trade credit insurance (TCI). TCI is an insurance policy your business takes out, which, among other benefits, ensures your invoices are paid by a third-party insurer, even if your customers are unwilling or unable to pay.
At Allianz Trade, we can also deliver insights into your customers. Our in-depth analysis connects you to the latest credit risk data to help you understand your customers and optimise your entire customer credit management process. This data will help you avoid the negative impact of overdue invoices by making informed choices on what payment terms and options to put in place.
