How to avoid unpaid invoices and the best ways to deal with clients who pay you late
In today’s blog post, I’ll explain how to avoid unpaid invoices and the best ways to deal with clients who pay you late, or even worse, don’t pay you at all.
Unpaid invoices and late payments regularly plague freelancers, consultants, and small business owners. If this problem is hurting your business’s bottom line, you’ll be glad to know that there are some ways to deal with habitual late payers that really work. I’m going to cover five ways to handle those pesky unpaid invoices and late payments, proven to work by real small business owners like you.
1: Send your invoice to your client right away. One of the best ways to get paid right away by a client is to send your invoice immediately after providing the good or service that you’re charging for. Ryan Holden is the director of Progressive Heating and Air, an HVAC company based in San Diego, California. He says that he has seen a 70% reduction in overdue invoices by sending his invoices early. By sending your invoices right after you finish a job, you’re top of mind for the client and they don’t have a reason to forget you. Invoicing software also makes it easy to get your invoices to your clients ASAP and reduce the friction around payments. For example, CloudBooks lets you schedule and send recurring invoices to clients that you regularly work with. You can even send invoices on the go from their mobile app.
2: Let your clients pay you online. The easier you make it for your clients to pay you, the sooner you’ll see their payment hit your bank account. Matt Woodley, a freelance digital marketer based in San Francisco and founder of MoverFocus.com, has seen a 10% increase in on-time payments since he’s expanded payment options for clients. Now Matt’s clients can pay by credit card, bank transfer, or PayPal. Payment processors like CloudBooks will integrate with your invoicing and accounting software and let customers pay an invoice online.
3: Ask your clients for an upfront deposit. Even asking for a small deposit upfront gets your client psychologically and financially invested in the work that you’ve done for them. For example, if you’re doing a thousand dollar job for a client, consider asking for a 25% payment up front and the rest after you complete the job. Dylan Sprouse, the co-founder of eco-friendly transportation site, SprouseBros.com, says that asking for upfront payment along with some other strategies has resulted in 80% of their clients paying them on time. Sprouse says requesting a deposit is a good way to gauge the professionalism of a client before you even start working with them, and you’re already setting the tone that being paid for your goods or services is an important part of the professional relationship.
4: Offer early payment discounts and charge late fees as needed. Many small business owners have luck with offering early payment discounts to their clients. As the name suggests, this simply means offering a 3% or 4% discount on pricing when clients pay within a certain timeframe, such as within 10 days of receiving an invoice. Many budget-conscious clients will bite and pay you on time to earn the discounts and this is great for your cash flow. Matthew Ross, co-owner and COO of The Slumber Yard, a mattress review site, says that about 40% of their customers take advantage of the early payment discounts, which gets them the cash sooner that they can then use for operating and other business expenses. On the flip side to early payment discounts, it can be a good idea to set and enforce late payment penalties. If the client’s known advance that you’ll charge, for example, 10% for an invoice that’s one week late and successively higher penalties for even later invoices, they’re more likely to get things in gear sooner.
5: Create a drip campaign for reminders. This is actually a tip from Brian Cairnes, CEO of ProStrategix Consulting. Drip campaigns are email marketing campaigns which automatically go out to customers on a set schedule. Normally, drip campaigns are used to nurture clients through a sales funnel, but Cairnes adopted the strategy for invoice payments. He ensures that email reminders to make a payment go out two days before the payment is due, the day that payment is due, and then plus two days, plus five days, plus seven days, plus 10 days, plus 14 days, and plus 21 days. After the invoice ages 28 days, it goes to collections with a penalty. Once payment is made, the client exits the drip campaign, and payment options are embedded in every email. According to Cairnes, this system decreases its late payments by 45% and collections by 72%. You can use email marketing software such as MailChimp to set up a branded drip campaign to your clients. Invoicing software also lets you send recurring email reminders.
6: To do homework on your clients. Doing a bit of research on a prospective client can go a long way towards reducing unpaid invoices in the future. Here are some tips for researching clients. First, look up their business credit report. Any business can look up the business credit report for another company and see how many accounts that the company currently has that are past due. Several overdue accounts should immediately send up a red flag. You should also ask other vendors. If you know that the business works with other vendors or fellow business owners, ask them if the client paid on time. And ask about their payment process. Before working with the client, ask about their payment process. If they have accounts payable department or dedicated staff for paying vendors, that’s a good sign.
7: Escalate the issue if needed. As a last resort, you can always escalate a late or unpaid invoice. This is most helpful when an invoice is overdue 90 days or more. You can retain a lawyer to write a demand letter on your behalf, which states that payment is due and that you’ll take legal action within a certain timeframe. Now, actually suing the client in court could be a waste of your time and resources, particularly for smaller invoices, but just sending a letter can incentivize many clients to pay. You can also hire a debt collector to chase down unpaid invoices. Just make sure that if things reach this point, don’t work with that client again.
Those are seven proven ways to deal with unpaid invoices and late payments. Following these strategies should help you improve your business’s cash flow.
