The top 7 reasons your customers don’t pay on time
- Lack of cash – “I couldn’t afford to pay” (44%)
- The invoice due date was not aligned with the day I usually pay my bills (36%)
- Lack of time – “I was too busy” (34%)
- The invoice had no payment instructions (32%)
- The invoice was sent to the wrong person or email address (26%)
- The invoice items or amount were incorrect (25%)
- I lost the invoice (19%)
The key is to have a few lines of defence. This ensures that the correct actions happen at each stage to increase the likelihood of payment.
First line of defence: Gentle reminders
Our data shows that up to 60% of invoices will be paid earlier if you send email reminders. In fact, our users tell us that our invoice reminders are brilliant for getting feedback, such as:
- “I’ve not received the invoice, please resend”
- “The invoice is incorrect, please amend as follows ”
- “The invoice has no payment instructions, please advise”
- “I’d lost this invoice, thanks for resending”
- “Can you please send the invoice to firstname.lastname@example.org instead?”
- “Thanks; I’ll pay this on the 20th”
As you can see, by using email reminders you can resolve 70% of the late payment reasons listed above. For the rest it’s going to require persistence and likely a phone call or letter to obtain payment.
Second line of defence: Firmer emails + phone calls
Once an invoice has crossed the first line of defence with no result then a firmer email or phone call is usually required. Some receivables specialists recommend a phone call every time if the initial gentle reminders have not had a response because clearly there’s an issue.
In our survey to 150 businesses however, 88% of respondents said that email was the preferred communication method. Plus, email has the added advantage of an audit trail if legal action is required further down the track. You might also consider having email reminders sent by another party so the situation looks more serious to your customer.
In many countries you’re well within your rights to send emails threatening legal action and the on-charging of collection costs (depending on your terms and conditions) and many of our users take this approach. The key is to have a process for further follow up and follow through to take the actions you threatened – being all bark and no bite sends the wrong message for future payments.
But herein lies the challenge. In a survey we ran back in 2015, “failing to enforce payment terms” was the number one excuse accountants cited as the reason their clients weren’t being paid. They said that many businesses were just too busy or disorganised to consistently follow up late payers, so they got into trouble.
Fortunately software like Debtor Daddy makes consistent follow up of late payers easy. [Stay tuned for some exciting updates designed to make follow-up beyond the gentle reminders a whole lot easier!]
Third line of defence: Send a demand letter
A demand letter is the perfect next line of defence for invoices that have still not been paid. You’ve sent your friendly and firm reminders so it’s time to give your customer one last chance before taking legal action.
A demand letter must include the details of the overdue account, your contact details and a copy of the original invoice(s). There are a number of online services for creating demand letters, but here’s a demand letter generator we created which has secured payment for a number of Debtor Daddy users.
Following a demand letter sent on your company letterhead, your next step is your local small claims court or, if the invoice is large enough, find a lawyer who will send a letter on their letterhead (they will usually do this for less than $50).
Are there holes in your defence?
After reading the above you should be able to identify if there are any gaps in your late payment defence systems. The questions to ask are:
- Are reminders automatically sent when invoices fall overdue?
- What happens once reminders have been sent? Who gets notified?
- Is there an audit trail of all communications sent?
- Do your terms and conditions allow for the on-charging of legal costs?
- Under what conditions is it appropriate to send a demand letter? Who will send it?
- Are you following through on your threats to take legal action or charge interest?
- Who’s ultimately responsible for receivables follow-up in your organisation?
After identifying the gaps, create a plan for resolving them and feel free to reach out to us if you need any help.