How do I collect overdue payments from clients?

Hi Kassandra,

Overdue payments are a chronic problem in professional services, which is why I've always advocated being paid in advance, even if it means a small discount. There are times when payments are late because of client cash flow problems (primarily in smaller businesses), or because invoices are lost, or because mistakes are made.

But late payments are usually a product of either overly bureaucratic rules being enforced or just sloth. When a client says "It takes 30 days to go through our billing cycle," in an age of computers, it really means that your invoice is sitting on someone's desk for 29 days. And every client can override a system to generate a check tomorrow. Can you imagine a senior vice president waiting 30 days for a paycheck? I think not.

When a payment is in violation of your terms for say, 30 days - then go back to your buyer on the 31st day. (If your invoice is due "upon receipt" as are mine, I allow a 30-day grace period for processing).

The letter on the next page is what you should send to your buyer. Don't argue with accounts payable or some processing clerk. Go back to your buyer.

I've provided two types of letters, one a gentle reminder and one a "last resort". I've had to on occasion use the first many time and the second rarely, but they're both important.

Some hints:
-Don't feel guilty or "pushy." It's your money and they are violating the contract they signed or agreed to.
-Follow up weekly until your buyer has a satisfactory answer.
-If you're not paid in 60 days, use the second letter.
-No matter what excuses you're offered, remember that you can't use them to pay your mortgage or your kids' tuition.
-If you're to be paid in installments, send an invoice for the installment 30 days ahead of time so that it can be produced on the due date.

Payment Overdue Reminder:

I need your help with something relating to our project agreement. Unfortunately, my second fee installment has not been paid, and it's now more than 30 days overdue. [Note: This can also apply to overdue expense reimbursements-ed.]

Would you please intervene with whoever is responsible in accounts payable to expedite this, and let me know what the status is? I know that you can probably do this in a few minutes, which is better than my making a dozen calls over the course of a few days.

Thanks in advance for your help. As you know, the project is going quite well, we're meeting all of our interim measures, and this is the only "glitch" to this point. I'll call you on Friday for our regular update, and perhaps you'll have some word by that time on this matter as well.

Payment Overdue Reminder 2 (one-time event):

Thanks for the opportunity to work with you and your people at the seminar. Your comments were very kind, and the audience was terrific!

Could you please help me with one remaining issue? I still haven't been paid the balance of my fee which contractually, was due at the time of the presentation. I don't want to arbitrarily start calling people, so I wonder if you might talk to the appropriate individuals in accounting and let me know when this will be processed.

Thanks in advance for your help. If I don't hear from you first, I'll follow-up on the 14th at 9 am by phone. Please call if you need anything else from me.

Payment Overdue Last Resort:

Note: Send this by FedEx or by email with a request for confirmation of delivery.

We have, unfortunately, a major problem which may significantly impact our project. As I've indicated, my current fee has not been paid on its due date and in fact is now over 60 days late, despite assurances of payment from you and people whom you've contacted, nothing has happened.

I know that you would not be able to tolerate the same behavior from your own customers, and I'm hoping that you can empathize with my position. But if I don't receive full payment of that installment by this Friday, I have no alternative but to stop all work on the project as of that morning. If that occurs, our schedule will be severely impacted since meetings, focus groups, field visits, and other activities will all be subject to rescheduling, and they were extremely difficult to put together in this time frame to begin with.

Naturally, I'd like to resolve this in the next couple of days, and I'm confident we can do that. But I must have my payment in hand by Friday morning or I'll have to call a halt to all work, including the sessions and interviews that are scheduled for that day.

Please call me as soon as possible to let me know what progress you've made.

Good luck!

I use late fees to encourage on-time payment. The payment terms are also listed in plain English. (e.g. Payment is due 30 days from invoice date. A late payment of 2.9% will be applied to all overdue charges. We accept Visa, American Express, and ACH payments).

I went to a Freshbooks workshop where it was explained that clear payment terms improve the chances of getting paid on time. I also learned that contact from the primary contact (versus accounting dept.) is also more likely to produce a payment.

I would like to try a "pay before x date for a discount" but my billing system doesn't support this type of offer. I send 3 automatic reminders and on the 3rd I mention that service will be suspended if payment isn't received within 30 days.

Something I'm about to try is a discount on all invoices paid via ACH (will require a manual adj).

For project-based work, full payment is required for projects <$5k, and a deposit is required before the project starts. Depending on the length of the engagement, I bill periodically throughout the project.

I keep the tone friendly in all communications as well. I understand your frustration when payments go into different fiscal quarters or years - especially when there are related expenses that have been paid. Hope this helps and good luck!

The first question is - did someone check their credit and establish a proper line of credit for them in the first place? Secondly, someone should have been following them closely for collection - was this done? Have you called these past due customers yourself to ask for immediate payment? You can close your books with overdue receivables. However, if you have to explain to owners/shareholders why you have past due receivables, then you better have a reasonable explanation. Lastly, hire a collection agency immediately if some of these past due customers are very late, or have problems that you know about.

You have two issues, one is an accounting issue to do with how you can accrue a receivable and your "close the books" issue with where you assign revenue. The more significant issue is to have a collections process at the end of your sales process (or what good was the sale?)?

Remember first there are three reason a bill does not get paid on time: 1) an oversight, 2) a payee has terms different than yours (ie they only pay after 45 days, 3) they don't want to pay either because they don't have the money, they feel they shouldn't pay or they think they can put off paying.

You can start with a carrot, it is not uncommon to advertise on an invoice a 1% discount for early pay (within 10 days say). Second, make your terms abundantly clear both on the sales contract/receipt and finally you can advertise a penalty for late pay. (If your terms are net 30, you get an additional 1% charge at 45 days and 1% more each 15 days.) Penalties can be tricky but can also be used as leverage ("I'll have the penalty waived if you can get payment in by the end of the week...").

Collection is the process you need to define. It might look like: at 30 days an email reminder, at 40 days a late notice. At 45 days a call from an associate and if that doesn't get satisfaction you do your enforcer step. That might be the Boss or someone who can sound both tough and understanding with the ability to negotiate options if required.

Point is the more passive you are in your process the more likely you will see payment issues, you may not have a guy named "Knuckles" who can twist arms for payments but strong conversation, willingness to be flexible and knowing when to be strong (and seek legal collection) all need to be processes in place for your business so you don't have deadline collections to close books, you have collections to get paid!

With you being in Dubai so of the collection methods that will work in one place may or may not work there.

Accounting has some changes around the world but most are similar and are either a cash or accrual system. Ether way the fact you have not been paid should not create a problem in terms of closing your books.

The systems we use for our A/R are that in some cases we offer a 5% discount for payment in 10 days (net 30). We also have a 1.5% late payment fee for accounts that go past due. Sometimes getting an invoice at the end of each month for a finance charge will prompt them to pay.

Usually once an account is 60 days past due we will call them and try to get payment. Sometimes we call once a week or once every two weeks.

If we can not reach the accounts payable people or they make promises that they don't keep we will then send them a certified letter (return receipt requested) telling them that if they don't pay within 15 days we will turn it over for collection.

If we have not received payment in 25 days (the 15 days plus a 10 day grace period) we turn the account in to a collection agency which seems to have good success but does cost me 25% of the amount they collect. The other option I have here is to file a claim in small claims court which can be very effective and the small filing fee is added onto the amount they owe. I usually only do this with ones that are close to us since you need to appear in person both when you file and when the hearing is scheduled.

Installment Plans – When you do come across a customer who seems to be in a financial hard spot and you really would like to help them out, installment plans are key. Having a customer pay you back in a smaller amounts over time is MUCH better than a customer not paying you back at all. It gets cash in your pocket immediately and says a lot to the customer, as you are doing them a huge favor. Work with the customer to create a payment plan that meets both of your financial needs. Ideally, it would be great to always receive all of your money up front.

Never begin a project without clear Engagement Contract terms, and a signed agreement that specifies when payments are due, and what happens if the payments are late (late payment fee). You also may include verbiage in your agreement, that should the client not respond to repeated requests for payment that a)your services will cease until payment is received (and cleared). Usually, if a client is late on payments, letting them know (kindly) that you don't want to have to 'interupt or cancel service' due to nonpayment if not received by : _____________ (date). Leave a documented paper trail (emails vs phone calls) and notice to reply. You can always copy your email correspondence and physically mail copies to their business address registered mail (where they have to sign for receipt-proving they got the message). Lastly, never take on a client or project that you have any suspicions they might default or not pay their bills. PS: Karma has a funny way of always catching up with deadbeats...

There are 2 bookkeeping methods: Cash, Accrual. For Cash you recognize money when you spend it and get it. For Accrual income is recorded when you enter the invoice and invoices not paid at month end or year end are listed as Accounts Receivable (an asset).
Deciding to collect is not based on year ending. It is a constantly daily or weekly endeavor. Call and pleasantly explain the due date is past and ask who pays the bills, talk to that person, ask if they have the invoice, ask when you will receive the payment. Make a note on a 3x5 card with that date +2 or 3 days. Watch the stack of cards and call again, and again, closer and closer together. It is a free loan you provided on trust. It is your money, not in your checkbook. Be pleasant and be a pest.

I am fresh from a bitter experience. I am a filmmaker and my production house is called Solluna Productions. After completing a project for a well known client, I waited for the payment. 30 days passed, 60 days passed, and 100 days passed. Meanwhile, I kept calling. I kept writing emails. I messaged on facebook. After several follow ups the person assured me the payment will be expedited. The assurance went into a cold storage again.

I managed to get hold of the payment department's number. Pursued it. It still did not work. Finally, I wrote a stinker email. The entire team woke up and started to respond.

The whole experience was painful. It certainly has left a bitter taste...

Here is what I have learnt. Never get into an engagement without a signed contract and ensure to take an advance before you commence the project. Make sure the advance is enough to act as a cover for the delay in payments.

This is one of the major problems we face when we are in business..

to avoid this, we always keep below points in mind

1. In our proposal itself we clearly mention payment terms and some rules like if there is any delay in payment that would attract 10% extra for one month and so on as a penalty.

2. Keep some part of work pending always where customer realizes your importance (especially in IT services)

3. If you have high number of customers in this category then announce some kind of a perk if (5%) less or 3 months free maintenance etc..if they pay before a particular date.

4. If you are fully convinced that the customer is not going to pay you, you have no choice except proceeding legally..

as BOB mentioned, it really depends on what business you are in ?? and how much your customer owe you?