Unpaid invoices have significant impacts on businesses, affecting more than just finances. The administration cost can strain operations, relationships and reputation.
Whether you are dealing with late payments from customers, or seeking to claim interest on unbilled debt, businesses need effective plans in place to guard themselves against the effects of non-paid invoices. Strategies like clearer terms of payment, automatic reminders and access to professional legal advice can be highly effective in enabling businesses to stay ahead.
In this article, we’ve outlined the consequences of unpaid invoices, and offered some advice on how to manage them effectively. Being aware of your rights and responsibilities is key to staying in control of cash flow and maintaining client relationships, whilst you build sustainable systems to resolve unpaid invoices.
3 pain points of unpaid invoices
Here are three of the biggest impacts of late or unpaid invoices.
1. Financial impacts
The most obvious impact of unpaid invoices is the disruption to cash flow. By directly reducing liquid capital, it can become more difficult for businesses to cover their operational expenses like payroll, utilities and supplier payments. In order to bridge these gaps, a business may turn to loans or an overdraft, that will incur additional costs from interest.
Spending on growth initiatives like expansion and marketing may be limited by a lack of funds tied up in unpaid invoices.
2. Operational difficulties
Downstream productivity effects from cash flow problems can hinder the day-to-day activities of a business, delaying investments in growth. The act of chasing unpaid invoices consumes time and resources that could otherwise be more usefully allocated. Focussing on these shallow tasks distracts businesses, and puts them at a disadvantage compared to others operating more optimally.
3. Relationship and reputation damage
A late payment to a supplier because of cash flow problems from outstanding invoices can erode trust, resulting in potentially unfavourable terms in future deals, or even the termination of a partnership. For customers, repeat outstanding invoices can ruin relationships and ward off future business prospects. Generally speaking, if a firm develops a reputation for being slow to pay their suppliers because of cash flow issues, overall market credibility will be significantly diminished. Legal disputes can even arise from long unpaid bills, eating up additional time and money.
The real danger of unpaid invoices is that they have a knock-on effect, as businesses impacted will delay their own accounts payable. One unpaid invoice could create several more further down the chain.
Willem van Lynden, Founder of Rise Funding
5 ways businesses can effectively manage unpaid invoices
There are a number of strategies a business can employ to manage unpaid invoices. Here are 5 tips that you can get started with today.
1. Keeping on top of due dates
Maintaining a centralised list of payment due dates can make it easier to track overdue invoices. Invoicing software can send automated reminders and follow-ups, reducing the administrative load.
2. Communication strategies
It’s best to start with polite reminders by email, or letter, making sure to include all relevant details like the invoice number, due date and amount owed. If these initial reminders fail, escalate the urgency by sending another invoice marked ‘overdue’. Phone calls are more direct than emails or letters, and can have better results. Just be prepared for negotiation of the terms, if the reminders get to this stage.
3. Flexible payment options
After a series of reminders, it may become clear that the client is struggling financially, and a feasible payment plan should be negotiated. The plan should make clear the expected minimum payments, and detail late fees or penalties for repeated delays. Ensure these are legally enforceable and clearly communicated in writing. To maintain client relationships, use an accounts department or designated separate email for chasing payments.
4. Legal support
Debt recovery specialists can be brought in for persistent non-payments to save your time. A last resort may be to send a formal legal notice, like a ‘Letter Before Action’, or pursue claims through the small claims court.
5. Invoice financing
Invoice financing allows businesses to access funds immediately, based on the value of unpaid invoices. Lenders can advance 75-95% of invoice values, allowing you to plug cash flow gaps without taking on traditional debt.
Next steps to take with unpaid invoices
If your invoices are still unpaid after effectively managing the clients, then there are some next steps you can follow in order to get paid, such as potentially charging interest on unpaid invoices or getting legal help.
Can I charge interest on unpaid invoices?
It is possible to charge interest on unpaid invoices, but only in certain circumstances. Our guide below has everything you need to know.
Statutory right to charge interest
Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses in the UK have the right to charge interest on late payments for business-to-business (B2B)transactions. The statutory interest rate is 8% above the Bank of England base rate. Additionally, businesses can claim fixed compensation fees ranging from £40 to £100 depending on the debt amount. It’s important to note that this right only applies to commercial contracts for goods and services. It excludes transactions with consumers, certain international contracts and non-commercial agreements.
Contractual interest
Businesses can negotiate their own interest rates in contracts, provided they are fair and proportionate. If a contractual rate is too low, it may be deemed unenforceable under the Late Payment Act. On the other hand, excessively high rates could be considered penalty clauses.
Contractual terms should clearly specify payment deadlines, interest rates, and how interest will be calculated to avoid disputes.
When can interest be charged on unpaid invoices?
If no payment terms are agreed upon, an invoice is considered overdue 30 days after:
The customer receives the invoice
The goods or services are delivered (whichever is later).
For public authorities, payment terms are capped at 30 days, while private business transactions generally cap at 60 days unless otherwise agreed.
Practical Steps
To charge interest, businesses should:
Include clear terms about late payment interest in their contracts or invoices.
Send a new invoice reflecting the accrued interest once a payment becomes overdue.
Keep records of all communications regarding overdue payments to support claims if disputes arise.
Interest charges can prompt early payment and recover the cost of late invoices. However, they must be in accordance with agreed contractual terms and UK legal requirements to be implemented properly.
How do I charge interest on overdue customer accounts?
As charging interest on overdue accounts to consumers does not fall within the Late Payments on Commercial Debts Act, you can only apply interest charges if they have been agreed to in advance, in your terms and conditions.
Good practice is to state clearly the rate of late payment interest and any charges in the payment terms of your contracts. Ensure the customer is fully informed about these terms before closing the transaction. The interest rate should be fair and in proportion, as excessive rates could be deemed unenforceable under the Consumer Rights Act of 2015.
Getting legal help
Unfortunately, bringing in the lawyers might be a step you need to take if trying to reclaim an invoice.
Often, simply the mention of lawyers might encourage your client to find the money quickly, but ensure you mention this in a calm and professional manner.
Your first step here is to consult the Business Disputes Register which will allow you to file a dispute, and also consider different steps.
For example, you might consider going to court or applying to make the company bankrupt, depending on the size of the invoice and the company in question.
Legal help might be the final step in securing an unpaid invoice
Conclusion
Late and unpaid invoices can have far-reaching consequences, from financial strain to reputational damage and operational inefficiencies. As we’ve shown, businesses can take proactive steps to manage outstanding payments effectively, including setting clear payment terms, leveraging automation, maintaining open communication with clients, and seeking legal support when necessary.
There are significant pushes from industries for the UK government to implement change to ensure that invoices are always paid on time. For example, a potential solution could be implementing penalties for unpaid invoices, such as preventing corporations with poor payment practices from receiving taxpayer funds or grants, or giving audit committees the authority to assess payment practices and report on it publicly.
