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Dealing with past due invoices is challenging for many companies. A past due invoice reflects missing income, and late payments can cause problems with cash flow.
Despite the stress of this, it is important to approach past due invoices in the right way. You want to ensure payment, even if late, and protect the customer relationship.
Read on to discover what a past due invoice is, and how to manage them in the best way for your business.
An invoice is marked as a past due invoice when invoice payment is late. Once an invoice becomes past due, you should inform the customer of the overdue payment. If your business has added late payment fees to the terms specified on the invoice, then you can also include these fees in the request for payment.
A payment becomes past due when it is past the date that it should have been made. This date is defined in the invoice. A past due invoice letter specifies the new payment amount and terms, with any penalties applied.
Late payments are a common issue. A 2019 study by Sage showed that 1 in 10 invoices were paid late in the US. Of these late invoices, 10% were written off as bad debt.¹
Past due invoices are a common part of company accounting and customer management. But they can be time-consuming and frustrating.
Sage’s research showed that small and medium-sized businesses spend an average of 15 days per year chasing late payments. Having a system in place to manage invoices, and produce professional reminders, can help save time. It should also help with timely payment.
The terms outstanding invoice and past due invoice are often used interchangeably, but they are not the same.
An outstanding invoice is an invoice that due for payment at a future date. The invoice has been sent out, and the customer needs to pay before the invoice due date, but this deadline has not yet passed.
A past due invoice is an invoice that the customer has not yet paid, and the invoice due date has passed. In other words, the customer is late with their payment.
Outstanding invoices should be sent to the customer on time and tracked to avoid them becoming past due invoices.
|Read on to find out:
Once an invoice payment is late, it is good practice to send a past due invoice and reminder letter. These documents notify the customer of late payment and form an important part of record-keeping in case of further problems.
Letters and emails should be kept polite and professional. The intention is to encourage quick payment. Maintaining a good ongoing relationship with the customer is vital – you don’t want to lose a good customer over a late payment.
Before sending a letter, you may want to check with the customer if they are experiencing any problems. A shipment could be late, they may have received incorrect invoice details, or they could simply have forgotten.
A quick check may be a lot easier, and better for the relationship, than a past due letter.
A first reminder is usually sent as soon as the invoice due date has passed. This first letter especially should be kept polite. At this point, the customer may have simply forgotten about payment. The letter (or email) should contain all the information needed to make a payment.
An example of a first past due reminder letter:
This is a friendly reminder that we have yet to receive payment on our last invoice. The invoice dated XXX, with reference number XXX, was due on XXX.
You can find a copy of the original invoice attached. Please let us know when we can expect payment.
If you choose to add a late payment fee at this stage, then you could use a letter like this:
I am writing to let you know that we have not received payment for our invoice sent on XXX, with reference number XXX.
This payment is now past due by XXX days, and a late payment fee has been added. Please find attached a new invoice for a total of XXX, which is due for payment immediately.
Please advise us when payment will be made or if you would like to discuss this further.
You should send a second reminder after 30 days. This time, the letter can be more firm and express a sense of urgency. It should still be polite, though. You may want to emphasize important information using bold.
As the payment is now very late, you should acknowledge that the customer may have problems with payment. If appropriate, consider offering alternative solutions or payment plans. Make it as easy as possible for the customer to pay.
An example of a second past due reminder letter:
I am following up on my previous email sent on XXX regarding the outstanding payment for invoice XXX, originally due on XXX.
This invoice remains unpaid and is now XXX days past due. As outlined in the payment terms, a late payment fee has now been added to this. The new total amount payable is XXX, and an updated invoice is attached.
If you would like to discuss alternative options for payment, please do get in touch. We hope to receive full payment as soon as possible, to avoid any further fees or action.
After 60 to 90 days, any outstanding payment is likely to be affecting your cash flow. The tone now should be more firm, with the aim of getting immediate payment. The letter should specify a deadline for payment and raise the possibility of further actions or referral to a collection agency.
You should also ensure follow-up by phone, and check that you are in contact with the appropriate responsible person.
An example of a third past due reminder letter:
This is to inform you that payment for invoice XXX has still not been received and is now 60 days past due.
*A late payment fee has been applied, and the total amount to be paid is now XXX. Please arrange payment of this immediately. *
If you would like to discuss this, or look at alternative payment plans, contact me by phone at XXX or email XXX.
If payment is not received by XXX, we will have to refer your account to a collections agency.
Late fee penalties can only be applied legally if they are specified in the original agreement before any work has started With both invoices and reminders, it is important to make the key details clear. If you use invoice payment terms such as Net 30, consider also providing a clear date by which payment should be made.
Likewise, make sure that the total amount due and the payment methods are easily understood. With international customers, don’t forget to specify the currency to use.
|💡 You can make it easy for international customers to pay you on time with Wise Business. Open a multi-currency account, and your customers can pay with ease in their local currency. You can then manage, convert and pay in different currencies - all from one account.
Before you start sending out reminders or issuing any penalties, make sure there are no problems with the invoice.
Contact the customer to ensure products or services were received as expected and the invoice has been issued correctly. You can also check internally that the invoice was sent correctly and to the right contact person.
Timing is more important than you might think if sending invoices or reminders by email. You want these to be received and given immediate attention. Fridays and weekends are never a good idea as emails are likely to wait along with many others.
|🔍 A study by Entrepreneur showed that Monday and Tuesday are the best days. To get even more specific, mornings are better than afternoons for sending invoices and reminders.²
There are many advantages to using software to manage and automate invoices. This is faster than handling manually, accurate, and will help audit and reporting. This extends to reminders too. With invoicing tools such as QuickBooks or Xero, reminders can be automated.
If you use QuickBooks Online, you can also sync Wise with QuickBooks to see your unpaid bills in real time and pay them seamlessly from your ‘Bills’ page on Wise. Your bill payments and any other Wise transactions will be synced, matched and categorised in QuickBooks for simple reconciliation.
To make things easy for customers, you should offer different options for making payment. This could include payment by credit card, check, or ACH transfer.
Including electronic payment details with the invoice allows the recipient to pay as soon as it is received.
|🔍 Research from Inc.com shows that companies are 30% more likely to get paid if they offer easy online payment as part of an invoice.³
Your first aim should always be to get the full invoice payment as soon as possible. If this is not happening, and the application of late payment fees does not help, then an alternative payment plan may.
This could involve delaying payment or splitting the total due into smaller amounts with a payment schedule. Recovering the money slowly is better than not at all.
If you have sent several reminders and the invoice is still unpaid after 60 to 90 days, it may be necessary to take things further. Explaining clearly in later reminder letters that you will do this may be enough to encourage payment. Of course, this is always beneficial to taking legal action.
There are several options for further enforcement. You could use a small claims court, or appoint a lawyer to handle it. The debt could also be passed to a collections agency. These options will have a cost, but you may deem this worthwhile, especially for larger invoices amounts.
|⚠️ Whether to take legal action is ultimately up to you. Doing so can be time-consuming and costly. You should also consider the customer relationship and any future or ongoing business.
The easier it is for customers to make payment, the more likely you are to get paid on time.
This is just as important with past due invoice reminders as it is with the original invoice. You want to remove any obstacle that could cause a delay in payment.
With international customers, currency conversion and complex payments are often a barrier. Wise can help get around this.
One-click payment is possible, and all payments are managed in one global account.
Over 200k businesses use Wise, you can register for free in the US and see why.
|💡 For all you need to know about invoices, don't forget to read and bookmark the ultimate guide to invoicing from Wise!
- Late payments: Why your invoices are delayed
- 8 Tips for Setting Up a Killer Invoicing System
- 7 Tips for Billing Customers
All sources checked November 4, 2021.
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
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