As a small business owner, you may be struggling to deal with late payments or clients who aren’t even paying their invoices at all. 

There can be many reasons why customers don’t pay their invoices on time. But at the end of the day, an unpaid invoice is not good for business and can be incredibly frustrating to chase down. 

So, how can you ask your customers for payment without being rude or jeopardising future business opportunities? Is there any way you can avoid these situations to begin with—ensuring your clients always pay their invoices in a timely manner? 

This guide will answer these questions and provide useful tips that will help you get paid on time.

Be Proactive

Even if you have a great relationship with your clients, it’s good practice to have something in writing that outlines the terms of this relationship. Common names for this type of document are Rules of Engagement, Service Agreements or Business Terms and Conditions. It doesn’t matter what you call the document—the important thing is having a legally binding contract that sets out the key parts of the agreement between you and your client, including payment terms.

Payment terms define when and how you expect to be paid. They may include details such as:

  • The due date for payment and the consequences of late payment
  • Accepted methods of payment (e.g. credit card, PayPal, and direct debit). It’s also important to outline whether there are forms of payment you don’t accept
  • Whether the client will need to pay a deposit
  • What currency you are dealing in, particularly if your business operates overseas

Having this agreement not only sets expectations to minimise confusion down the track, but will also help strengthen your relationship with your customers.

Payment Options To Explore With Your Clients

One way to ensure you’re paid for your products or services is to ask for full payment upfront. However, while some clients may be willing to pay in advance, others may not. For instance, a new client who isn’t familiar with the quality of your product or service may be less inclined to pay in advance. 

In these cases, you may consider asking for a deposit. This is a common practice for more expensive products and services. It makes sure you get paid something, even if your client defaults on the rest of the bill. And, as an added bonus, it’s a great way to build trust and strengthen your business’ relationship with the client. 

Another option you may wish to consider is negotiating a payment plan with your client. This is particularly helpful if your client is having cash flow issues. Setting up a payment plan can ensure you get paid, as it will take into account what your client can afford and over what period of time payments are to be made.

Let’s run through these various payment options in an example:

Sally runs a boutique creative agency and has been engaged by a client to design a website. 

Prior to starting work on a project, Sally requires her clients to pay the full amount. However, if the client is new or is otherwise reluctant to pay the full amount, Sally may charge a percentage of the bill before she starts to work on the project, with the remainder due once the website design is complete.

Lately, some of Sally’s clients have been experiencing some cash flow issues. Sally doesn’t want to lose these clients and is willing to negotiate a plan for them to pay in instalments. The clients then pay a negotiated amount over a specified period of time until full payment is made.

The Importance Of Invoicing Your Clients Promptly

As a small business owner, you’ll likely be wearing many different hats and juggling a handful of tasks at the same time. It can be easy to forget to send your client an invoice, or to lose track of whether or not they have paid. 

It is best to get into the habit of sending invoices as soon as a job is complete—while your product or service is still fresh in the client’s mind. Not doing so might give your client the impression that, since you took your time to invoice them, they can take their time in actually paying you. 

Keep Communication Flowing

Friendly Reminders

You don’t need to wait until an invoice is late before sending your client a reminder to pay. 

Send a friendly email or letter—accompanied with the original invoice—to the client as the due date approaches. You can follow up again if the accounts go past due. The more personal you make the email, the better. 

If you don’t hear back from a client, try giving them a call. Make sure you have as much information as possible handy, including the invoice number, date, and outstanding amount.

Keeping in touch with your client and sending them reminders may be all it takes for them to pay the invoice. They may simply have forgotten about the bill or paid the money into the wrong bank account. 

A friendly reminder email could look something like this:
Subject: Invoice Number [reference number] – Payment Reminder
Dear [Name],
I just wanted to remind you that [amount owing] in respect of Invoice Number [reference number] is due for payment on [due date]. The original invoice is attached below for your reference.
Could you please let me know when I can expect to receive payment?
Thanks in advance for your understanding and cooperation.
Best regards,[Your name]

Overdue Payment Reminders

If your client has missed the due date for payment or hasn’t responded to you at all, you may want to send them an overdue payment reminder. Again, this might be done over the phone or by sending your client an email or letter. 

You may wish to accompany emails and letters with the original invoice with an ‘overdue’ stamp on it.

An overdue payment reminder could look something like this:
Subject: Invoice Number [reference number] – OVERDUE
Dear [Name],
I have yet to receive the payment of [amount owing] in respect of Invoice Number [reference number], which was due for payment on [due date]. The original invoice is attached below for your reference.
Could you please let me know when I can expect to receive payment?
Best regards,[Your name]

Final Reminder

If your client still hasn’t paid after friendly reminders and overdue payment reminders, you may wish to send them a final reminder to request payment. 

A final reminder email could look something like this:
Subject: FINAL NOTICE – Invoice Number [reference number] 
Dear [Name],
I have yet to receive the payment of [amount owing] in respect of Invoice Number [reference number], which was due for payment on [due date].
The invoice is now [number of days overdue] days overdue. We require immediate payment of this amount to avoid further action. Please contact me immediately to advise when I can expect to receive payment.
Thanks in advance for your understanding and cooperation.
Best regards,[Your name]

Options of Last Resort

If your client doesn’t pay at all, there are a few actions you can take. Let’s run through them.  

Sending A Letter Of Demand

Sending a letter of demand should only be considered as a last resort, as it has the potential to irreparably damage your business’ relationship with a client. However, if all previous attempts to contact them and receive payment have failed, it may be necessary to pursue this avenue to make sure your business is paid for the products or services delivered.

A letter of demand not only lets the other party know that you’re serious about getting paid, but also gives them an opportunity to pay you before the matter escalates to court.

A letter of demand will typically address:

  • the amount owing
  • what the amount is for
  • the due date for the payment
  • what action you will take if the client does not pay on time (for example, taking them to court)

It is important that you keep a copy of the letter and send it by registered post. This may be used as evidence if you need to make a claim in court.

Using A Debt Collection Agency

If you still haven’t been paid after friendly reminders, informal negotiations, and sending a letter of demand, you may wish to use a debt collection service. 

It may be worth letting your client know that you plan to use a debt collector, as it could encourage them to pay the overdue invoice. Going down this path may damage your relationship with a client further, so you will need to assess whether it is worth it to recover the money you are owed.

At this stage, it is important to consult a professional for advice. The Australian Competition and Consumer Commission (ACCC) has prepared guidelines for debt collection, which can be found here.

Taking Legal Action

If all else fails, you may be looking to take legal action against your client. Legal proceedings can be expensive and take a long time, so it’s important that you weigh up these considerations against the likelihood of recovering the debt, as well as the debt amount itself. 

Need Help?

It’s important that you’re paid for the goods and services you provide. Whether you’re drafting your payment terms, chasing unpaid invoices, or anything in between, we’re here to help! 
Our friendly team can be reached at team@sprintlaw.com.au or on 1800 730 617 for a free, no-obligations chat.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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