What It Means To Be Past Due On An Invoice

Summary

Key Takeaways

More than a quarter of the UK’s small and medium-sized businesses are reporting thousands of pounds worth of invoices are past their payment date.
Late payments of invoices cost businesses huge amounts of time and money, but they’re often due to clerical errors, customer service issues, or straightforward forgetfulness.
Chasing down late invoices eats into administrative time, but steps can be taken to reduce the incidences of past due invoices and protect your business from their impact.

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According to research undertaken in 2023, past due invoices cause huge problems for small and medium-sized businesses around the UK. Over a quarter of businesses report being owed between £5,000 and £20,000 in late invoices, a figure that increased over the past year. And one in three report needing to spend upwards of 20 hours per month dealing with the administrative challenges of chasing payments.

But what does it mean to be past due on an invoice? And how can you protect your business from the cash flow and administrative impacts of customers being unable - or unwilling - to pay on time?

What does it mean to be past due on an invoice?

Simply put, a past due invoice is any invoice not settled in full, on time, for any reason.

Every single invoice your business sends should come with specific payment terms - including the amount of time your customer or client has to settle the invoice you sent. For many SMEs, this time is 30 days, but for larger businesses, 60 or 90-day payment terms are common.

When an invoice hasn’t been settled within the specified time period, it is simply an outstanding invoice that hasn’t been paid yet.

If this time expires without payment being made, then the outstanding invoice becomes past due.

Why do invoices become past due?

Not every unpaid invoice is a sign that a customer doesn’t intend to pay.

One of the most common reasons is forgetfulness. When people don’t have a standing order or direct debit set up, when they’re dealing with multiple invoices with different payment dates and terms, they can simply forget that a particular invoice is due.

There’s also the possibility of a clerical error. Maybe the invoice was sent to the wrong email address or the wrong person at a business. When this happens, it’s possible that an invoice simply hasn’t been seen by the person responsible for taking care of payment.

Finally, there are significantly more serious reasons. A customer could withhold payment because they’re unhappy with the service provided, or they believe that you are in breach of your contract. It’s also possible that an invoice is past due because your customer just doesn’t have the funds. This is always a potential risk when offering accounts receivable terms. It could be that your client hasn’t been paid and so can’t pay you - or it could be a sign of a more serious issue with their finances.

How to deal with late payments

Because you can’t be sure of the reason that an invoice hasn’t been paid yet, it’s always best to maintain a good relationship with your customer with a steady, measured approach. The last thing any business wants is to alienate a potential repeat buyer by threatening legal action over a clerical error or poor time management.

Start with friendly reminders and offers of assistance, before becoming more insistent and serious over time. Sometimes your clients will just need some breathing space, or the chance to pay in instalments. Other times, there may be a serious issue that requires legal intervention.

As a rule of thumb, consider the following time periods:

1-2 days past due: Send a quick note to the customer - or set up your invoicing software to send automatic reminders. Gently explain that their invoice is past the payment date and ask if there’s a particular reason for it.

7-14 days past due: Once a week has elapsed, follow up your written reminders with a friendly phone call. Try to address the reasons behind a late payment, confirm when an invoice will be settled, and follow up by re-sending the invoice.

30-60 days past due: At this point, you should be looking for alternative solutions. Explain how urgent it is that the situation is resolved, make them aware of the terms and conditions (especially any late payment fees), and offer a payment plan if it's appropriate.

90+ days past due: If payment still hasn’t been made after 90 days, you should start to escalate the process. Explain to your customer about the consequences of non-payment, and seek legal assistance if needed. The threat of a claim being taken to court may be enough to finally deliver a payment, or you may need to actually go through with legal action.

5 ways to avoid past due invoices and reduce their impact on your business

To avoid the worst-case scenario of costly and time-consuming legal action, the best course of action is to prevent invoices becoming overdue in the first place. These five simple tips can help to reduce the impact of late payments on your business:

1: Know who’s responsible for payments

You should know exactly who to speak to at every customer business about payment issues. Ensure that these contact details are correct, and that they are being sent your invoices.

2: Remind customers ahead of time

There’s no reason to wait until an invoice is past due to speak to your customers. Reminding them a week in advance that a payment is due can help to ensure that payments are made on time and in full.

3: Automate your invoicing processes

Using the right invoicing software can reduce your administrative workload and ensure payments are made on time. Many invoicing software packages include automated reminders that you can schedule to ensure customers know when a payment is due.

4: Add late fees to your terms and conditions

Even if you never charge a late fee, adding late fees to your T&Cs can incentivise customers to pay on time. Let them know that if a payment isn’t made in good time, you reserve the right to charge an administrative fee to cover the time needed to resolve the issue.

5: Protect your business with trade credit insurance (TCI)

The final way to protect your business is with trade credit insurance. If a customer fails to pay, whether it’s due to insolvency, refusal or an inability to pay under the terms of the contract, having a TCI policy will be there to indemnify your losses.

How can Allianz Trade support you?

With a TCI policy from Allianz Trade, you’ll also be given access to data that helps you to understand your customers’ credit risk. We analyse daily changes in corporate solvency, covering 98% of global GDP to ensure you avoid extending credit to businesses who are repeatedly late with their payments.

Whether you’re a small or large business, find out more about our market-leading TCI solutions. When you’re ready to take the next step, our specialist team is ready to provide you with advice and support. For a free TCI consultation, call our UK team on 0800 056 5452.