The Ultimate Guide on Collecting Unpaid Invoices

An unpaid invoice is one that the client hasn’t paid, even after it’s gone overdue. These invoices are also referred to as overdue invoices, and they are a fundamental reality of many freelancers, contractors, and small business owners.

Since late payments negatively affect your cash flow, everyday operations, and business growth, knowing what to do when an invoice is not paid is essential.In this article, we’ll explore reasons why invoices go unpaid and then give you a step-by-step guide on how to collect those payments. We’ll also explore the risks of not handling unpaid invoices properly, and give you some tips and strategies on how to prevent them from happening in the first place.

What is an Unpaid Invoice?

An unpaid invoice, also called an overdue invoice, is an invoice that has been sent to the client but hasn't been paid yet.

People often think that an outstanding invoice and an unpaid invoice are the same thing, but there is a difference.

An outstanding invoice can be sent to the client before the payment is due. In this case, the payment can still be made on time. But you can't say the same thing about an overdue invoice, the due date of which has already passed.

Why Do Invoices Go Unpaid? 5 Reasons

Understanding why invoices go unpaid is the first step toward resolving the issue or preventing it from happening in the future. Here are the most common reasons why invoices go unpaid:

• Missing or incorrect information. A simple typo in business information, an incorrect amount, or a wrong or missing purchase order (PO) number will likely stall the payment process. This is particularly prominent with large companies, where administrative departments automatically reject invoices that don’t precisely match their records.
  
  
• Vague payment terms. If you don’t have clear payment terms in your invoice (e.g., Net 15 or Net 60), the client may assume they have an indefinite amount of time to pay. This often results in overdue invoices that only get paid after reminders.
  
  
• Client cash flow issues. In some cases, a client may simply not have enough capital to pay your invoice. They might be facing financial issues while waiting for their own outstanding invoices before being able to pay you.
  
  
• Invoice sent to the wrong recipient. Large companies often have dedicated departments for processing payments. If your client is one such corporation, you could make the mistake of sending an invoice to your point of contact, instead. This can cause significant delays before your invoice reaches the correct recipient.
  
  
• Unintentional administrative oversight. Business owners and administrative professionals can be exceptionally busy, which can cause them to simply miss an invoice. This isn’t intentional, but simply an oversight that can lead to an unpaid invoice unless you follow up to remind them.

How to Receive Payment for Unpaid Invoices in 8 Steps

Now that you know what an unpaid invoice is, let's talk about some ways to get your payments, even if they are late.

#1. Identify the Invoices

The first thing you should do is look through all of your invoices to see which ones need to be paid.

If you have your invoices organized, you shouldn't have any trouble with this. So, for example, if you have invoices organized by client, service type, month, etc., you will be able to go through them easily.

You will save yourself even more time and trouble if you have a general idea of which client may have been late or which month's payment was late.

#2. Send an Overdue Invoice Letter

Once you know which invoices haven't been paid, you can find the clients and send them an unpaid invoice reminder via email.

Depending on the invoicing software you are using, you could have an option to set up automatic reminders so an email is sent out X number of days after the invoice becomes overdue.

You can then send an overdue invoice letter several days after the invoice due date has passed. So, if the payment was due on the 30th of the month, you can send the letter on the 3rd or 4th of the next month.

The letter should have a friendly tone. Make it more like a reminder than a demand for the client to pay.

#3. Send a Final Letter

You can send an unpaid invoice email with a final letter if your client doesn't respond to the first letter or doesn't pay as promised.

In this letter, you can be firmer and more insistent because you are owed the money, and your kind request hasn't been addressed appropriately.

#4. Call the Client

If none of the letters work, calling the client is one of the final direct steps. Even though it might be hard, you have to do this to get what is rightfully yours.

You can be nice and understanding, but you should also stand your ground and request payment.

#5. Stop Doing the Work

If the payment is late, you don't have to keep working. After they have paid, you can move forward.

You can even put this in your original contract, but even if you don't, you can stop working until you get paid.

If the payment is very late and there's no good reason for it, you should stop working with that client altogether to avoid stress in the future.

#6. Charge Late Fee

If someone pays you late, you can charge a late fee. However, this can only be done if it is written into the original contract, and both parties agree on it from the start. Moreover, you need to comply with your state’s usury laws, as they cap the interest rate that you can charge. A standard late fee is between 1% and 1.5% per month (or 12% to 18% annually).

It's good to have a late payment fee because you never know when someone will be late. This not only makes sure that everything is done as agreed, but it also encourages clients to pay on time so they don't have to pay the fee.

#7. Hire a Collection Agency

If nothing you do works, you can seek assistance from someone else. One option is to hire an unpaid invoice collection agency, preferably one that specializes in getting people to pay what they owe within 90 days.

These companies get in touch with the client, maintain contact with them about the situation, and use certain methods to get the payment. Many of these agencies work on a contingency basis, which means they’ll only charge you a percentage of the debt after they’ve successfully recovered it.

#8. Legal Action

If the agency can't get the payments, your last option would be to turn to unpaid invoice legal action.

You can hire a lawyer and talk about how to handle the situation. You could sue the client or take them to court. For smaller amounts, you can file a lawsuit without a lawyer in small claims court. Keep in mind that these courts have limits that vary depending on the local jurisdiction, and typically range between $3,000 and $10,000.

But be sure to think about how much such actions will cost. If you are owed a large sum, it may be more worth it than if you are owed a small amount, where the cost of legal fees might outweigh the total amount owed.

Unpaid Invoice Email Template

Here is a simple but professional template that you can use to write an unpaid invoice email reminder:

How to Prevent Unpaid Invoices: 5 Effective Strategies

It's important to know what to do if someone doesn't pay your invoices, but it's even better to know how to avoid such situations. So, here are a few things you can do to get paid on time.

#1. Set Clear Payment Terms

Make sure that all the terms of the agreement are clear when sending invoices to your clients.

In your invoices, include information such as the payment due date, how long the customer has until they have to pay, the billing cycle, and what will happen if they don't pay on time, such as late fees, pausing the work, and so on.

Once the payment terms are clear, there won't be as much room for confusion or the desire to figure it out on your own, which could lead to even more complications.

#2. Get Paid in Advance

If you worry that you won't get paid on time, it might be a good idea to ask for the payment before you start working. You can do this by sending an advance invoice or a deposit invoice for a partial payment.

You also need to explain why you are asking for the prepayment, since clients may not agree with this. One of the most common reasons for a down payment is to cover project-related expenses, including materials and other operational costs.

#3. Allow Multiple Payment Methods

Another good idea is to give the customer more than one way to pay the invoice. The more ways your clients can pay you, the easier it will be for them to do so.

If you only offer one way to pay, it's likely that the client won't be able to pay you. This could be because they don't know how to use that system or because it will take them time to figure it out, which will delay payment.

To stop this from happening, give them a number of choices. Stripe, PayPal, Crypto, Venmo, Payoneer, credit card, and bank transfer are all common options.

#4. Automate Payment Reminders

Manually tracking invoices and sending payment reminders is a time-consuming process, especially if you have multiple clients and many invoices. Automating these processes will save you many hours of work while ensuring you don’t make mistakes or forget to send reminders.

You can set up a system to send reminders before the invoice is due, on the exact due date, and once the invoice becomes overdue. From there, you can also send structured reminders at precise intervals (e.g., every 15 days) until the invoice has been paid or you escalate the situation.

#5. Conduct Credit Checks

Credit checks can help you minimize risk if you’re dealing with large contracts. They are especially important if you’re working with a new client whom you don’t yet know well.

By looking at their payment history, you’ll know which net terms to set and whether to extend credit. If you notice that the client has a history of defaulting on payments, you can ask for a significant portion (or even the entire amount) of the invoice to be paid in advance.

5 Tips to Help You Resolve and Avoid Unpaid Invoices

Here are some tips to help you deal with unpaid invoices:

1. Always remain professional. When dealing with unpaid invoices, remaining calm and collected will only highlight the fact that you are a professional looking to be compensated for the work you did. It will also aid in keeping the situation under control without resorting to extreme measures such as arguments or even legal action.
   
   
2. Talk/negotiate with the client. Communication is key in any form of agreement. You should talk with your client and find out why they haven’t paid. The chances are the reasons are valid and understandable, and all that was needed was proper communication.
   
   
3. Allow a payment plan. When clients don't pay their invoices on time, it's a good idea to set up a payment plan for them. If a client hasn't paid because they are having financial troubles, this will give them a chance to relax and get their finances in order while still providing you with payment.
   
   
4. Document every interaction. Keep detailed records of all emails, messages, and calls that you exchange with the client. The information they contain can be essential in case of confusion or dispute. You can use this documentation as proof in case you need to escalate the collection process or resort to legal action.
   
   
5. Know when to escalate. If multiple reminders fail and the invoice payment is still late, it may be necessary to move faster to more persuasive actions. You need to recognize when the client seems unwilling to pay, even if they communicate otherwise. Delaying final notices, collection agencies, or legal steps reduces the probability of a recovery.

Most Common Business Risks of Not Handling Unpaid Invoices

Businesses can run into trouble if they do not handle their unpaid invoices in a timely manner. Here are the most common risks associated with that:

• Can’t take on more projects. If you don't get paid on time, your cash flow will go down. This means that you may not have the capital to work on new projects. As a result, you won't be able to support the growth of your company.

• Unable to pay the suppliers. If you don't get paid by your clients, you might not have enough money to pay the suppliers for your business. This is likely to hurt your relationship and make it less likely that you'll work together again in the future.

• Facing operational challenges. The lack of cash flow caused by late payments will not only make it hard to take on more projects, but it will also make it hard to keep the business going and make sure it runs smoothly.

• Difficulties with making smart financial decisions. When your payments are late, it throws off your income, which makes it hard to make good financial decisions because you don't know when to expect how much money.

Avoid and Resolve Unpaid Invoices with Paystub.org

At Paystub.org, we developed a feature-rich invoice generator that will help you professionally bill clients and minimize instances of outstanding payments.

The tool comes with ready-made templates, a user-friendly interface, and intuitive controls that let you number and date your invoice with ease, add tax types and rates, include payment terms and discount types, and more.

Final Thoughts

Unpaid invoices are a reality for many businesses and freelancers. Fortunately, dealing with them becomes much easier when you have a structured approach that combines proactive steps with collection strategies.

Let’s reiterate the key takeaways from this guide:

• An unpaid invoice occurs when the client doesn’t pay it after its due date has passed.

• Unpaid invoices happen for many reasons, including having incorrect or missing information on an invoice, using vague payment terms, and sending it to the wrong recipient, as well as clients unintentionally missing them or having cash flow issues.

• To collect unpaid invoices, you first need to identify them and then send an unpaid invoice letter.

• If the client remains unresponsive to reminders, you should call them, stop doing the work, charge late fees, consider collection agencies, and even escalate to legal action for unpaid invoices.

• To prevent unpaid invoices, set clear payment terms, require advance payments, allow multiple payment methods, automate reminders, and conduct credit checks.

Unpaid Invoice FAQs

#1. What happens if an invoice is not paid?

If an invoice is not paid after the payment is due, it becomes a breach of contract. Depending on the circumstances and your relationship with the client, you can deal with unpaid invoices by sending reminders, applying late fees, pausing your work for them, or even escalating to legal action.

#2. Can I charge interest on an overdue invoice?

Yes, you can charge interest on an overdue invoice, but the terms have to be clearly outlined in the initial contract. Moreover, the fees need to comply with your state’s usury laws, which means they can’t be higher than the established cap (which is typically between 1% and 1.5%).

#3. How long should I wait before sending reminders?

You should wait one or two days before sending polite reminders for unpaid invoices. If that doesn’t resolve the issue, you can follow up again within 7 days, and then establish a structured follow-up schedule (e.g., three more reminders every 15 days) before escalating the situation.

#4. What if a client disputes the invoice?

If a client disputes the invoice, you should immediately stop your collection efforts and review the case. Listen to their concerns and examine all documentation relevant to the invoice. If there’s been a mistake on your end, you need to rectify it immediately before proceeding further.

#5. How long before an invoice is considered unpaid?

An invoice is considered unpaid as soon as the due date passes (on the next business day). For example, if you’re using a Net 30 payment term, the invoice is considered unpaid on the 31st day, and you should begin the collection process according to your payment terms.