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How to Manage Accounts Receivable (and What to Do When Clients Won't Pay)

Max Freedman
Max Freedman

To be an effective debt collector, educate yourself on the situation, document your actions, and avoid assumptions.

Managing accounts receivable and pursuing outstanding invoices is essential to running a business and maintaining cash flow, second to getting and keeping clients.

Outstanding invoices reduce cash flow and can prevent you from meeting your expenses. When a client doesn't pay an outstanding invoice by the due date, you have to address it. But it's also difficult and sensitive issue. 

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How to improve your invoice collection process

There are a few ways you can be more effective at invoice collection. Follow these 12 tips to make your invoice collection process easier.

1. Be prepared.

If you think calling a client to request payment is uncomfortable, imagine how much worse it could be if you are wrong. Before picking up the phone, do some digging, and make sure that payment from the client was actually never received, or that the client never talked to someone in your organization to renegotiate payment terms.

It's also worthwhile to understand your client's business and learn about whom you'll be speaking to. Don't start a conversation about the collections process with the wrong person at the company. Politely ask and ensure you're speaking to someone who can talk knowledgeably about your past due invoice.

2. Educate yourself.

Learn your rights and what the regulations are for B2B collections in your area. Knowing what you can say and do helps you confidently negotiate with a client about a past-due invoice. It also prevents you from taking an action that could jeopardize your legal position if you have to bring a case to small claims court or take other legal action.

3. Document, document, document.

When talking to a client about an unpaid invoice, take detailed notes. Document whom you talked to, and the date and time. Record what your client says. Keep copies of emails exchanged, letters sent and any other documents that provide a complete picture.

Compile your notes, and keep all your documentation together. You may need it in the event of future legal action. And if your client does eventually pay, record a formal receipt of their payment.

You may find it helpful for your documentation to send another invoice. You can even change your invoice template to better suit the client's needs. If the client continues to say they will pay you soon but fails to do so, you can always ask them if there is an invoice template that will accelerate their accounting team's processes.

4. Don't make assumptions.

Don't assume anything about why your client hasn't paid you. Many companies simply forget to pay an invoice and are more than happy to take care of it once they are reminded of it with a friendly but to-the-point letter or phone call.

You may want to check your client's credit history, if possible, to see if they have a history of late payments. If you find a sound credit history, you may receive your payment sooner than you think.


5. Stay professional.

There are a lot of negative emotions tied up with invoice collection. You're worried about paying your own bills, there's concern about how unpaid invoices will impact your business, and there's anger over your work being disrespected. It's also easy to feel like you're being taken advantage of.

Put all of that aside when talking with a customer about unpaid bills. As mentioned earlier, they may have forgotten, or there might be a legitimate reason why they're delaying payment. Lashing out isn't likely to get you paid any faster, and you might lose a good client who is simply going through a rough patch or is forgetful.

6. Establish payment terms.

Whatever the reason for the late payment, work with the client to get a commitment from them to fulfill their obligation to you. You may consider taking a lesser amount to get the unpaid invoice off your books, or you could set up a payment plan if the client wants to pay you but can't come up with the full amount at the present time.

Regardless of what you agree to for remittance, find out when and how they plan to make payment, and document the information. If you offer a payment plan, ensure that you are both clear on how that will work, and, again, document the agreement.

7. Follow up.

Until you receive payment, follow up.

Start with documenting and sharing any payment agreements you came to in your discussions, whether those were for a payment plan or a new date.

If a check doesn't arrive when expected, follow up within a few days of the missed payment. You can also inquire with your client about setting up a payment method that may be more convenient for them such as direct deposit or a PayPal business transaction. Continue to remind the client that they owe you and that they need to live up their end of the agreement.

8. Send a demand letter.

If consistently following up doesn't work, send a demand letter detailing your formal demand for payment, listing every acceptable payment method, and outlining the next steps you'll take if your demands are not met by the due date. Upon receiving a demand letter, your client may realize how serious you are about receiving your payment and feel compelled to pay you before legal action ensues.

9. Impose a late fee or late payment interest.

After regular follow-ups and a demand later, if your client is still stalling on paying you, notify them that you're imposing an additional late fee and adding interest to the bill. The client may potentially realize that they lose more money by delaying payment rather than paying you.

10. Consider hiring an invoice factoring company.

At this stage, you may feel the need to take more aggressive action. Rather than hiring a collections agency, consider using an invoice factoring company.

Through invoice factoring, your business can take out loans against the unpaid invoice while alerting the client that their invoice remains unpaid. When your client learns that you have hired an invoice factoring service to help with your cash flow, they may be more likely to pay your the invoice. Learn all about invoice factoring and whether it's right for your business.

11. Take your client to small claims court.

If none of the previous steps work, take your client to small claims court. Small claims court handles disputes that range from $2,000 to $7,500 – the maximum amount allowed in small claims court varies by state.

Small claims court can be an especially budget-friendly debt collection option since you don't need to hire a lawyer, and you automatically win the case if your client fails to show.

12. Consider hiring a debt collector.

If all else fails, hire a debt collection agency. You should expect that any client you turn into collections won't be continuing the relationship, but then again, do you want to provide products and services to someone who doesn't pay?

Image Credit: Ivan-balvan / Getty Images
Max Freedman
Max Freedman Contributing Writer
Max Freedman is a content writer who has written hundreds of articles about small business strategy and operations, with a focus on finance and HR topics. He's also published articles on payroll, small business funding, and content marketing. In addition to covering these business fundamentals, Max also writes about improving company culture, optimizing business social media pages, and choosing appropriate organizational structures for small businesses.