How to collect overdue invoices without losing the customer

Start with the ageing report

Collecting starts with a list, not a feeling. The accounts receivable ageing report takes every unpaid invoice and sorts it by how far past its due date it is: current, 1 to 30 days, 31 to 60, 61 to 90 and over 90. Run it every week, not just at month-end.

Read it from right to left. The older a debt gets, the less likely it is to be paid, so the over-90 column gets your attention first, then 61 to 90. A customer who is a few days late on one invoice usually needs a reminder, not a confrontation.

Before you chase anyone, check the report is right. A payment received but not applied to the invoice, or a credit memo never applied, makes a paying customer look late. Calling someone about a bill they already paid is the fastest way to annoy a good customer.

Make late payment less likely

• Agree terms before the work. Put the payment terms (for example, net 30) on the quote and the invoice, and set them on the customer so every invoice gets the right due date.
• Invoice promptly. An invoice sent two weeks after the job is two weeks of payment time you gave away.
• Make paying easy. Put your bank transfer details, mailing address for cheques and any card payment link on the invoice itself.
• Take a deposit on large jobs. Money received up front cannot go overdue. See customer deposits and retainers.
• Send the invoice to the person who pays it. At a larger customer, that is often accounts payable, not the person who hired you. Ask for their email.

A reminder schedule that works

Most late invoices are paid after a reminder. What matters is that reminders go out on a schedule rather than when you happen to notice. A schedule many small businesses use:

Keep a note of every contact: the date, who you spoke to and what they promised. A customer who says "it will be paid Friday" gets a call on Monday if it was not. Those notes are also the evidence you need if the debt is later written off.

A phone call often works where three emails did not. The question "Is there anything wrong with the invoice?" gets you either a payment date or the real reason it has not been paid.

A statement is useful because it lists every open invoice, not just the one you are chasing. Customers who pay by statement, as many larger businesses do, may not pay an invoice they have not seen on one.

Late fees and interest

A late fee or finance charge only works if the customer agreed to it. Put it in your terms, on your quotes and on every invoice: for example, the annual interest rate charged on balances more than so many days past due. Adding a charge nobody agreed to usually produces an argument, not a payment.

• United States: how much you may charge, and how it must be disclosed, is set by state law, and the rules for consumers are stricter than for businesses. Check your state's limits before you choose a rate.
• Canada: under section 4 of the federal Interest Act, if a written contract states interest per day, week or month, the interest is capped at 5% a year unless the contract also states the equivalent yearly rate. So state an annual rate. Provincial consumer protection laws add their own rules for consumers.

In the books, a finance charge is a small invoice to the customer, credited to a finance charge income account. It is income when you charge it, which is why some businesses only charge it to customers who will pay it and waive it for the rest:

If you waive it later, a credit memo against the same income account reverses it.

Payment plans

A customer who cannot pay $6,000 now may be able to pay $1,000 a month. That is usually better than a collection agency's cut or a court date. If you agree a plan:

1. Put it in writing: the total, the amount and date of each payment, and what happens if one is missed.
2. Stop new work on credit until the plan is paid, or ask for payment up front on new work.
3. Apply each payment to the oldest invoice first, so the ageing report shows real progress.
4. Diary each due date and call the day a payment is missed, not a month later.

The invoice stays as it is in your books; each payment is received against it like any other. There is nothing to reverse unless you agree to forgive part of the balance, which is a credit memo or a partial write-off.

Collections, and when to stop

• Collection agencies usually work on a contingency fee, a share of what they collect, and their fee varies. Agencies collecting consumer debts are regulated, in the US federally and by state, and in Canada by each province.
• Small claims court is cheaper than a lawyer for modest amounts. The limit and the time you have to file vary by state and province, so check yours before the debt gets old.
• Write-off. When a customer has closed, gone bankrupt or stopped responding after months of reminders, write the invoice off so your receivables show only money you can expect. On the accrual basis that gives you a deduction; see how to write off a bad debt, including getting back sales tax or GST/HST you already remitted.

In AcboBooks, overdue invoices show on the home screen, and the A/R Aging report has the buckets above, a write-off button per customer, and a CSV export. Customer terms set each due date. From an invoice you can email a payment request with your payment instructions, or create a Stripe card payment link if you have connected Stripe. Statements show the ageing and can be saved as one PDF for every customer with a balance. Assess Finance Charges applies your annual rate, grace period and minimum charge to overdue balances. There is no payment-plan or collection-agency feature, so plans are tracked in your own notes.