Collecting Unpaid Invoices: UK Business Owners’ Guide

Collecting unpaid invoices is perhaps one of the least favourite tasks that a business owner has to complete. Unfortunately, though, there will always be customers that allow their invoices to become overdue. This means that collecting unpaid invoices is usually a regular duty for many firms.

 

 

The importance of collecting unpaid invoices promptly

Despite the awkwardness of chasing up clients and customers, making sure that overdue invoices are paid is essential for a healthy company. This is chiefly down to how crucial a strong cash flow is to businesses.

Any business owner will attest just how many individual costs are involved in the day-to-day-running of a company. With all of those costs continuously being pulled from your business, you’ll of course need an equally steady stream of income ready to replace it.

You can guarantee that the companies you owe money to have stringent repayment rules in place, so you’ll need similarly clear deadlines for your clients to ensure that your cash flow doesn’t trickle out.

 

Why might invoices go unpaid?

Thankfully, you’ll find in the majority of instances that clients have simply been forgetful. You’ll realise yourself that the life of a business owner can be frantic. Many are spinning so many different plates that things like payment dates for invoices can occasionally slip by them. Even if they have a specialist team working on their finances, human error always has the potential to be a factor.

Cash flow issues are a problem for many companies. It’s possible that your client is waiting on clients of their own to pay up before they can pay you. This technically makes them insolvent, but there are an alarming amount of companies operating close to the edge that operate just like this.

You may also encounter a disgruntled customer who simply refuses to pay. They could have a genuine reason that they feel they shouldn’t have to pay. Less scrupulous firms, meanwhile, may simply be hoping to avoid a large bill. Either way, it’s often a good idea to engage with such clients in an effort to determine what can be done before things become inflamed.

Unpaid invoices come about for a variety of reasons, but usually they occur because of poor credit management. This could be something as simple as not having a purchase order number, or invoicing the wrong legal entity.

According to a recent PS Finance survey of financial directors and owners of small businesses:

• around 13% have invoices that go unpaid each year
• of all invoices issued, 39% are unlikely to be paid on time
• over 25 hours a week are spent chasing unpaid invoices
• nearly 30% claim that issues with cash flow could result in staff redundancies
• 20% say that unpaid invoices would mean having to refuse new business

 

 

What can you do to prevent having unpaid invoices?

The starting point is to avoid having a disputed invoice in the first place.

Businesses, and especially smaller businesses, focus a great deal around selling, but rarely put the same energy into thinking about invoicing and collecting debts.

Yet it’s the invoicing and collections process that turns promises into cash. So don’t leave it to chance. Get your contractual terms right and ensure that your terms govern the contract before you get to invoice stage. Also, if possible, credit check your customer – a sale is only valuable to you if it is paid for.

You should set up a routine for invoicing and collections, including polite reminders before the money is due, and stick to it. Some customers will look out for signs of disorganisation and use them to determine which suppliers they can get away with paying late.

Don’t be a victim; do what you can to ensure that you’re at the top of the payments list. If possible, ensure that you:

• understand your customers’ payment processes and systems
• get to know the individuals who deal with invoices
• use a purchase order if needed and ensure that your invoices fit in to their way of working
• check their reputation among other suppliers, and adapt the way you work accordingly

 

What are your rights to charge interest?

The law gives a supplier the ability to charge interest on overdue payments. Of course, charging valuable customers a punitive rate of interest is easier said than done.

Most businesses don’t make use of this right unless their customers are failing businesses, or if the relationship with a customer is damaged beyond repair.

But it’s still useful to clarify, in writing, that you reserve the right to charge interest. Some suppliers even do this automatically when debts become overdue, and invoice their customers for the additional interest right away.

The point of this is rarely to actually receive the extra money, but rather to jolt customers into paying on time.

 

Creative cash flow funding

Of course, best practice in credit management requires a professional resource, and businesses should invest accordingly. Alternatively, you can be more creative by looking at various cash flow funding mechanisms, such as invoice financing (factoring).

Invoice finance is a way of generating cash flow funding. It uses your invoices as the principal asset against which money can be raised.

This form of business finance takes any unpaid invoices that a company has supplied for its customers on credit, and advances it as a lump sum against those invoices.

The costs involved with invoice finance compare favourably to more traditional forms of lending, such as overdrafts and loans, and can often provide up to 4 times more working capital. This therefore allows your business to take advantage of supplier discounts offered as a result of earlier payments being made, for investment in plant and machinery, or for the general cash flow of the business.

As well as advancing cash, the lender can assume responsibility for managing the sales ledger. It therefore tends to suit businesses that do not have a dedicated in-house credit department, as it provides payment collection services where the weight of a professional third party provider can assist in the collection of debt owed.

In effect, it takes the headache of the invoicing and collections process away from the business and puts it into the hands of an expert.

 

Recovering debt from unpaid invoices

If the worst happens and you haven’t been able to prevent your invoice from going unpaid you’ll need to look at action to recover the debt.

One way to recover business debts that are overdue is to instruct a solicitor. This method is usually cost effective as most individuals will pay up immediately once they have heard from a solicitor; this is the reason that many firms specialise in this work.

Re-negotiating debts with the help of a solicitor is often the quickest way of achieving repayment, rather than seeking court action immediately. This is also recommended as a way to lower costs and keep the customer for future business.

A further option is to use a debt collection agency to collect in on the debt for you. Some companies use these firms as a default for any late payments. This will of course depend on the industry and payment structure of the business. You should be aware, however, that once a debt has been disputed, the services of a solicitor should be sought if you plan to argue the point, as DCAs (Debt Collection Agencies) will be unable to deal with any disputes.

 

Not sure what to do?

If your company is struggling with unmanageable HMRC debts, poor cash flow, or an uncertain future, you are not alone. We speak to company directors struggling with the same issues as you every single day, and we are here to give you the help and guidance you need.

Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation

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Effective methods for collecting unpaid invoices

There are several ways in which businesses can attempt to claim their money from clients. Each will suit different scenarios to one another, so take a moment to think about which may suit yours best.

 

Sending a letter/email

This is usually the first port of call for anyone collecting unpaid invoices. Many overdue payments are a result of genuine mistakes, so you should be careful not to approach clients to aggressively at first. At this stage your communications should reflect that the overdue payment could be an oversight. While you’ll still need to be firm, this should act as a friendly reminder rather than too much of a warning.

 

Calling to chase up

Emails and letters can be easy to push to one side and forget about. If you’ve sent two or more letters/emails without a result, you’re unlikely to gain anything from pursuing this route further.

One of the most effective ways of collecting unpaid invoices is to pick up the phone and call the client. This reminds them that it’s a human at the other end of the invoice and can prompt them to try to avoid the awkwardness of any more calls.

 

Offering a payment plan

If you’re still struggling to receive payment after letters, emails and phone calls, you can count out any simple oversights on the debtor’s part. By now it’s simply a case of either not being able to pay it, or not wanting to.

Assuming it’s the latter, the negotiation of some sort of payment plan can sometimes be the only feasible way for your client to pay you.

You’ll still need to be firm in any negotiations, however. Your client will be looking to pay back as little as they can over the longest possible period. This is of little benefit to your business though. Try to determine what the minimum payments you can accept are before entering any negotiations.

 

Letter of claim

A letter of claim is a formal letter which threatens legal advice against the debtor. This should be issued before any court proceedings are embarked upon.

There are a number of aspects which a letter of claim should cover. These include the amount owed, details of the agreement, instructions for payment, and many more details. Following the instructions to create a letter of debt may seem like a lengthy task, but a well-honed letter will expedite any court proceedings.

 

Instructing a solicitor to work on your behalf

By this point, you’ve probably already gleaned that your client has no intention of paying their debt. By instructing a solicitor to contact the debtor on your behalf, you instantly show them that you’re serious about collecting unpaid invoices.

This can often prompt clients into paying. The inclusion of a formal third party suddenly makes matters seem more serious. This is the first chance to show that you’re willing to take action should you need to and can often make reticent debtors think twice.

 

Issue a statutory demand

This is a document that sets out to prove that the debtor owes you a certain amount of money and demands payment in accordance with sector 268(1)(a) Insolvency Act 1986. It operates as the first step in legally winding up a business (if the debt is more than £750). As such, it’s important that you only look to use this option when there are no others available.

This is often used as a far quicker alternative to starting court proceedings. Once delivered, your client has 21 days in which to pay the debt.

Because a statutory demand does not directly involve any courts either, it’s also a lot cheaper. Templates can be found online too, simplifying the process significantly.

 

Winding-up petition

If your business is owed more than £750, you can petition to wind up the debtor company. This process sees an application made to the court to have the company wound up. Once received, the court grants a hearing date to decide upon the outcome. If the debtor company fails to respond to this, then judges often automatically rule that it has to be wound up.

Once a business is wound up, all of its assets are sold off, and the takings distributed among its creditors. Being paid what you are owed is dependent on whether the debtor company has sufficient money or assets to pay. You may also find yourself further down the pecking order to be paid than you might like if the wound-up business has a number of secured debts.

 

As you can see, there are a number of options available to businesses collecting unpaid invoices. Each is suitable for different stages along the way, ranging from gentle reminders to actively beginning a winding-up order.

Don’t be put off collecting unpaid invoices by any thoughts of awkwardness. Businesses are set up to make money, and many companies need several prompts before finally paying. If there’s no prior agreement in place between the two parties, the government states that customers must pay within 30 days of receiving the invoice.

 

Are unpaid invoices disrupting your cash flow?

We’ve helped countless businesses to assess their options when they’ve found handling their cash flows challenging. Call us for free, no-obligation advice from one of our friendly specialists. You’ll be given all the guidance you need for the best route to take your business.

As business rescue specialists, we can help you to discover the best possible solution to any issues your company might be having. Call us on 0800 975 0380, or email [email protected] for a free consultation.