How a Small Business Can Collect Unpaid Invoices

Start with a clear paper trail

Collection works best when you can show the agreement, the delivery of work and the invoice. Gather the documents before you contact the customer.

Before the first call, assemble what you would need to prove the debt:

• The signed quote, contract or purchase order
• Proof of delivery or completed work
• The invoice with its due date and terms
• Copies of every reminder you sent

Clear payment terms printed on every invoice make the whole process easier. Our beginner's guide to invoicing shows what to include.

The first 30 days past due

Send a friendly reminder as soon as the invoice is late, follow with a call, then a firm written notice. Most customers pay at this stage.

1. Day 1 to 3: short email with the invoice attached and a payment link.
2. Day 7: phone call to a real person in accounts payable. Ask when payment will be made.
3. Day 15: written notice restating the amount, due date and any late fee in your terms.
4. Day 30: final notice naming the next step you will take.

Be factual and calm. Many late payments are simple oversights or internal approval delays. See tips for collecting unpaid invoices for sample wording.

Offering a payment plan

If the customer is short on cash but willing to pay, a written payment plan often recovers more than an argument does.

A customer in trouble may pay $2,000 a month for five months, but cannot pay $10,000 at once. Put the plan in writing, set dates and state what happens if a payment is missed. Consider asking for a signed acknowledgment of the debt.

Do not stop work or release further goods until the plan is in motion. Decide in advance how much exposure you will accept on any single customer.

Escalating: agencies, demand letters and small claims

If reminders fail, options include a demand letter, a collection agency or a court filing. Each has a cost, so weigh it against the balance owed.

• Demand letter: a formal letter, sometimes from an attorney, that gives a final deadline.
• Collection agency: usually takes a percentage of what it recovers, so you net less.
• Small claims court: an option for smaller balances. Filing limits and procedures vary by state.
• Civil lawsuit: for larger balances, and slower and costlier.

Illustrative example: on a $3,000 debt, a collector keeping a third nets you $2,000. That may still beat writing off the full amount. For more on this path, read successful debt collection techniques.

Laws on collection practices differ by state, so confirm the rules or ask an attorney.

Prevent the next late payment

Check new customers, collect deposits on big jobs, invoice quickly and shorten payment terms. Prevention costs less than collection.

Tighten the system that produced the problem:

• Run a credit or reference check on larger accounts.
• Take a deposit or milestone payment on big projects.
• Invoice the day the work is done.
• Offer easy payment methods, such as ACH or card.
• Charge a late fee if your agreement allows it.

Track the age of every receivable each week. A growing pile of 60-day invoices is a warning sign long before it becomes a loss.

Covering the gap while you wait

Unpaid invoices can leave you short on payroll or supplies. A line of credit or working capital can bridge the time until customers pay.

Waiting on a $25,000 invoice does not stop your own bills. Funding can fill the gap if the cost is lower than the problem. In this illustrative case, paying $1,500 to cover a 45-day delay is sensible if it prevents a missed payroll or a lost job.

ROI Funder places business lines of credit and working capital for businesses with 500+ FICO, 6+ months in operation and $20,000+ monthly revenue. We do not offer invoice factoring or accounts receivable financing. Read our invoice factoring overview to see how that product works.