Struggling with unpaid invoices can be frustrating, especially when you’ve delivered work or services in good faith. But don’t worry – there are effective strategies you can use to ensure you get paid what you’re owed. Taking control of the situation protects your cashflow and sends a clear message that your business is serious about financial responsibility.

In this post, we’ll explore practical steps to escalate and recover debt, from negotiation to legal options, so you can maintain your business’s financial health.

Start with clear communication

The first step in addressing unpaid invoices is a direct and professional conversation. Often, clients don’t intentionally avoid paying – they may have forgotten, encountered their own financial issues, or faced an administrative error. Reaching out with a polite reminder is a positive way to clear up any misunderstandings. Always start by confirming they’ve received the invoice and know the due date.

Follow up with a written reminder if a verbal reminder doesn’t work. This should be firm but friendly, including the invoice details and a new payment deadline. Offering a clear deadline ensures no ambiguity about when payment is expected. You may also want to offer options like payment instalments or short-term credit, as this flexibility can sometimes speed up the resolution.

Formal escalation: Sending a demand letter

If communication hasn’t resolved the issue, it’s time to escalate your efforts. A demand letter is an effective way to formalise the process. This letter outlines the amount due, a final payment deadline, and a statement of intent if payment isn’t received. It’s often enough to prompt action, as it signals to the client that you’re serious about collecting the debt.

A well-written demand letter should include:

• Invoice details (date, number, and amount owed)
• A clear payment deadline (often 7 or 14 days from the letter’s date)
• A brief explanation of next steps if payment is not made (such as passing the debt to a collection agency)

Keep your tone professional and avoid emotional language. If possible, the aim is to resolve the situation without damaging the business relationship. After all, clients may still be valuable in the future, so maintaining professionalism throughout the process is key.

Consider using a debt collection agency

Outsourcing to a debt collection agency can help if you’re not progressing with communication and demand letters. These agencies specialise in recovering outstanding debts and will take the pressure off you to chase unpaid invoices. In the UK, debt collection agencies typically charge a fee or a percentage of the recovered amount, so it’s important to weigh the cost against the benefit of getting paid.

Before engaging an agency, ensure it is reputable and licensed. Using a licensed agency ensures it operates within the legal boundaries set out in the Financial Conduct Authority (FCA) guidelines. A good agency can act as a neutral party, potentially salvaging the client relationship while securing payment.

Legal action as a last resort

Legal action is usually the last step in the debt recovery process, and it’s not one to take lightly. However, if the amount owed is significant and previous efforts have failed, you may need to consider it. In the UK, the first stage of legal action is often filing a claim through the Small Claims Court for debts up to £10,000. This process is straightforward and doesn’t require a solicitor, although you may want legal advice to guide you.

The cost of taking legal action will depend on the size of the debt. For example, a claim between £1,000 and £1,500 will cost £80 to file, while a claim between £5,000 and £10,000 costs £205. If the court finds in your favour, you can recover the amount owed plus court fees. However, be mindful that court proceedings can strain business relationships and take time to resolve.

Preventing late payments in the future

Once you’ve recovered your debt, it’s time to look at ways to prevent late payments from happening again. One of the best ways to do this is by establishing clear payment terms upfront. Ensure your contracts and invoices include specific payment deadlines, late payment fees, and your rights in case of non-payment. In the UK, businesses are entitled to charge interest on late payments at 8% above the Bank of England base rate, plus compensation for debt recovery costs.

You might also consider offering incentives for early payments, such as a small discount. On the other hand, introducing penalties for late payments can deter slow payers from delaying.

Investing in accounting software that automates invoice reminders and tracks payment deadlines can help streamline your process and reduce administrative errors. With cloud-based tools, you can monitor your cashflow more effectively and avoid letting late payments slip through the cracks.

Seek help

Chasing unpaid invoices can be challenging, but with the right approach, you can recover what’s owed to you and protect your business’s financial health. Start with open communication, escalate with formal letters, and consider debt collection agencies or legal action if necessary. Remember, taking control of your invoicing process helps maintain a strong cashflow and keeps your business running smoothly.

If you need more personalised advice or assistance with managing your business finances, Total Accounting is here to help.