What to do when a customer owes you money
14th February 2017
When you’re running a small business it can be very easy to fall into the trap where you’re so busy delivering work or winning new work that invoicing and chasing up unpaid invoices from jobs that you finished a couple of months ago falls to the bottom of the list. Before you know it an invoice is over 3 months old and the customer is not responsive to your telephone calls or emails.
At this stage it’s best to take a systematic approach and diarise a series of actions;
1. If you haven’t already, send a statement clearly showing what invoices are owed. A friendly covering email or letter would help and offer to send copy invoices. Follow this up with a telephone call to check they received it. Make a note of any calls/correspondence.
2. If the customer is happy to pay but “just needs a bit more time” then, rather than give further extended credit, suggest a payment plan to settle the invoice over a timeframe that you’re happy with.
3. If the customer is being more difficult/ignoring your calls/emails, then we recommend a series of chaser letters to be sent over a period of approx. 4 weeks:
a. Letter 1 would be friendly but firm eg ‘we regret to note that your balance remains unpaid’
b. Letter 2 would be firmer, referring back to letter 1 but requesting payment is sent in the next 7 days
c. After 7 days, put the customer ‘on notice’ that unless payment is made within the next 7 days then legal action will be taken (before you threaten legal action – make sure you’re happy to actually follow it through and pay the necessary fees – see step 4 below).
d. A final reminder could then be served ahead of legal action being formally set in motion
Often the ‘threat’ of legal action works but if not, you will want to set in motion a court claim. You can do this online via gov.uk for invoices owing up to £100,000. Copies of letters you have sent the customer will be good evidence that this customer had plenty of opportunities to either pay you or query the amount he owes you. You will need to pay a fee to submit the claim and the fee is on a sliding scale according to the size of the debt. You can include a claim for interest on overdue debt.
For habitual slow-payers, you might want to consider negotiating different terms, eg for the next time you work with them you might request a deposit or full payment upfront.
Review your standard terms and conditions and make sure they include clauses to allow for late payment interest to be charged when an invoice falls overdue by a certain number of days.
If you’re a client of ours, enrolled in our Fee Protection Service, then the free business support helpline is also a great tool if you need further commercial legal advice when dealing with a difficult customer.
Here’s some top tips for minimising the amount of aged sales invoices on your books;
1. Email your invoices to your customers asap after completing a piece of work – make sure you’re emailing the right person(s), ie those who will approve and pay the actual bill.
2. Have appropriate payment options available for your customers and detail these on your invoice, eg bank transfer, Paypal, card payment facilities. If you accept cheques then make sure it’s clear where they need to send it to.
3. Keep on top of who owes you money – the best way to do this is having a systematic approach to your bookkeeping eg a regular time each week or month to sit down and look at everything
4. Email out statements showing how much is owed at the end of the month
5. As soon as an invoice falls overdue – send a friendly email to the customer or pick up the phone to check they received your invoice and set a calendar reminder to follow up in a week or two. Keep a note of any conversations/emails.
6. If the invoice falls significantly overdue then follow the guidance above.
All of the above can be made simpler if you use a cloud based accounting system like Xero. Xero offers easy tools for invoice templates, email templates, statements, reports showing who owes you money and also a place to record notes/activity on debt chasing.
Following these tips will guarantee improved cashflow in your small business!