How to Collect Money from Clients Who Won't Pay | Tips for Avoiding Non-Payment (2024)

11 Min. Read

November 21, 2022

Unfortunately, non-payment is an issue that most businesses have to face at some point.

You sent a prompt invoice. The client gets their automatic FreshBooks reminder. And…nothing appears in your bank account.

What do you do now?

It’s easy to lead with emotion. You’ve done the work, and payment should follow promptly. But now is the time to take a deep breath. You don’t want to escalate the situation into full conflict. Finding a balance between understanding and also getting paid, is the best way forward.

As a small business owner, the more options you have at your fingertips, the better chance you have of resolving any non-payment situation. That means you retain positive working relationships, save money on unnecessary legal fees and, ultimately, get your invoices paid in full.

The Problem with Non-Paying Clients

Cash flow issues can be extremely damaging to the health of your business. We all like to operate in good faith, with the expectation that all parties act with professional fairness. And maybe all your clients have been great, so far.

But it’s wise to have a plan before anything goes wrong. The probability is that you’ll need a system to collect overdue money from a client. Just ask the question at your next networking meeting.

The Freelancers Union were so concerned that they completed a large piece of research in 2014 and found that 71 percent of freelancers struggle to collect late payment from a client at some point in their careers. And 2,500 of the 5,000 participants said they’d experienced total non-payment at least once during their freelance career. This totaled an average annual loss of $6,000 in unpaid invoices.

Given the growth in the freelance economy, imagine how much that’s risen now.

Statistically, this is a problem you’ll face at least once in your career. So, let’s dive into how to collect money from clients who won’t pay.

How to Collect Money from Late-Paying Clients

Successfully collecting money from late-paying clients starts with your mindset. Yes, it’s annoying and time-consuming to be forced to chase up late payments. But we’re all in business with other people. And the quickest way to get the money you’re owed is to understand why your invoice isn’t settled already.

There are all sorts of reasons why your client hasn’t processed your payment, like illness, personal problems, financial difficulties, the person who does the accounts is on holiday, general disorganization, or they just plain forgot. You know what life’s like—you’re a person too.

Or maybe they have a legitimate question to ask you about fees or work done. But they haven’t gotten around to the discussion yet.

Of course, you need to be paid what you’re owed, regardless of the reason. But once you understand the reason for the late payment, you can choose the best way to get what your client owes you.

1.Send Polite Email Reminders

So let’s start by assuming the best. The first step with any overdue payments is a polite reminder email. Keep the tone light and factual. Nice, non-judgmental phrases like, “Just checking you’ve received our invoice dated..” Or, “You’ve probably just forgotten, but the invoice date was [date]. A quick confirmation that you’ve received this reminder would be great. I don’t want to charge late fees!” (Yes, with a jovial exclamation mark!)

Depending on how well you know this client, you might be able to personalize it even more. Use your own judgment here.

If it’s a new client or one you don’t know very well, you can use a payment reminder email template to help you draft a suitably professional email.

Showing empathy and a positive attitude makes it much more likely that you’ll receive payment and maintain the business relationship, especially if it’s a small business.

Keep everything polite and include helpful information like the invoice date, payment due date, your payment process, and the payment methods you accept. You might also want to draw attention to the late fees outlined in your original contract at this point.

It’s thoughtful to attach the original invoice to this reminder email, to save them the time searching through their inbox.

2. Pick up the Phone

If you don’t have success collecting outstanding payments with your email reminders, try picking up the phone. Again, it’s best to start by giving them the benefit of the doubt. This is still at the friendly reminder stage.

Instead of “clients who won’t pay,” they might actually be “clients who didn’t get your email because it went into their spam folder.” And a 2-minute chat gets the outstanding invoices paid.

Phone calls can be a much friendlier way to collect money from clients because they can tell you what’s preventing them from sending payment. Sometimes it’s just easier for people to express themselves verbally.

Especially if you’re dealing with small businesses, you can often sort out payment with a couple of phone calls. Maybe they can pay you over the phone with a credit card. Or you can set a new payment timeline for the overdue bills to be settled. Payment plans are something you can offer at this point, to make sure you eventually receive your full amount.

3. Contact the Billing Department Directly

If you’re trying to collect money from a large company, you may need to speak to someone other than your initial contact. Try going directly to their billing, finance, or accounts team. This department runs the invoicing system and knows the current status of your invoice. They’ll be able to explain any issues that are preventing payment, give you a realistic payment timeline and push for a quicker settlement.

4. Cut off Future Work

While you’re waiting to collect money from clients who won’t pay, it might be time to pause any future work with them. This prevents the debt from snowballing and protects your cash flow. Service businesses will need to suspend their provision, making it clear that there will be no ongoing services until the overdue payment is made. And suppliers need to make sure that no more physical products are delivered until payments are received.

This is an incentive for them to pay so that they can continue with other projects. And it protects you from losing any more time or money to an unreliable customer.

You send clients a “final notice letter” to tell them that no work proceeds until they have settled their debt. It’s a final notice because it’s their last chance to make payment before you initiate more formal proceedings.

As well as notice that future work is cut off, this letter should include:

• Payment due date on the original invoice
• Demand to make payment by a particular date—most businesses allow 2 weeks
• How to pay (list all your payment methods)
• What happens if they don’t pay by then

5. Send a Final Demand Letter

Now things are moving from “let’s sort things out between ourselves,” to “I’m going to have to get a third party involved.” If your final notice letter doesn’t get results, your next step is a definite escalation to a formal final demand letter.

This letter demands payment from a client by a certain date and states that formal collection procedures will follow if it’s ignored.

You’ll need to prove that you sent a final demand letter to your client if you decide to pursue legal action.

It must include:

• A clear statement that the client has defaulted on invoice payments
• Total amount your client owes, this includes any additional late fees
• Due date by which you must have received full payment
• The consequences if your client refuses to make payment by the due date

At this stage, it’s advisable to pay an attorney to write and send this on your behalf. An official legal letter may be enough to prompt action. And the cost of a letter is far less than that of hiring legal representation for a lawsuit.

It’s not the start of full legal action or a summons to small claims court. And you’re not bound to this attorney, should you decide to move forward with further legal action.

What if the final demand letter doesn’t get results?

You’ve got three main options to collect money from clients who don’t respond to your final formal letter: Arbitration, a collections agency, or legal action. All three will cost money, time, and some level of stress. So it’s important to weigh things up carefully before you decide on your next move.

6. Hire a Collection Agency

To escalate the situation and get outside help collecting your money, you can consider hiring a collection agency. They are often very successful at collecting payments from debtors. But they charge a hefty fee for the service, often as much as 50 percent of the total payment. However, it can be a good option to get back at least some of the money you’re owed.

A collection agency buys the debt from you, very cheaply, and then they are fully responsible for either recovering the money. Both state and federal laws regulate collections agencies.

7. Go To Arbitration or Take Legal Action

Instead of going to court, you can opt to take the client to arbitration instead. Arbitration can be a relatively quick and cheap way to collect payment from a client. You hire a third party (an arbitrator) to make a decision based on the evidence you provide. The arbitrator’s judgment can be enforced in the same way that a judge’s can.

If the outstanding debt isn’t too large but you don’t think you’ll be able to collect it on your own, you can consider suing the client and taking them to small claims court. Every state has small claims courts that resolve disputes involving relatively small amounts of money, usually to a maximum between $2,000 and $10,000, depending on the state. Small claims court is relatively inexpensive and quick. You don’t need a lawyer to represent you and if the client doesn’t show up, which is common, you’ll win by default.

If the money you’re owed is more than the limits set for your state’s small claims court, you can sue your client in superior court. Superior court cases usually take more time to go to trial than small claims cases and you may wish to have a lawyer representing you. There are substantial legal costs involved if you go down this route. You also need to assume that there will be no future working relationship with this client if you decide to sue them.

Protect Your Future Invoices

Here are 5 top tips to protect your business from clients that don’t pay.

1. Draw Up a Contract

Make sure you have a written contract agreed upon before you start any work. This must contain your payment expectations, payment terms, payment process, payment options, payment plan, and payment deadline.

It’s also worth talking through all elements of how clients can pay you, as well as all these other details, at contract signing time. This gives clients the chance to clarify any details and gives you the reassurance that they fully understand.

2. Send an Invoice

Send invoices as soon as the work is complete. Make sure they are accurate and make it as easy as possible for clients to pay invoices. This promptness shows that you value your own payment terms. You also need to track invoices thoroughly, so you can intervene quickly if a customer refuses to pay.

3. Apply Late Fees

To encourage clients to pay on time in the future, consider adding a clause to your payment terms that include late payment fees that you’ll charge for overdue payments. Be sure to talk to your clients about your late fees as part of your initial contract conversation. They shouldn’t be a surprise on your invoice.

4. Make an Early Payment Offer

This is the carrot to the late fees stick. Some businesses offer money off to clients who pay early. It’s usually a small percentage of the total invoice, for example, 5% off, if they pay before a certain date. If you decide this is a good option for you, think about the wording of the offer carefully. Make sure it’s very specific and be clear about the parameters.

5. Request a Deposit or Payment Schedule

To better protect yourself from late payments in the future, consider requesting a deposit at the time you sign a contract for new work. It’s common practice to request a deposit from clients of 25% to 50% of the total value of the contract.

As a small business, you may want to secure payment upfront either at 50% or 100% of the total before you start a project.

For a longer-term project it might be best to create a schedule of payments at milestones during the project. For example, as a section of work is complete, or on a monthly basis.

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