Unpaid Invoices? How To Collect From Clients Who Won't Pay

By Haley Davidson

Founder & Content Strategist, Gaia Content

If you don't how to collect from clients who won't pay, it can lead to major cash flow issues. 😬 In fact, a recent survey by Melio and YouGov showed that late payments have forced 40% of small businesses to delay hiring, 39% to postpone purchasing inventory, and 36% to consider cutting employee hours.

To keep cash flow steady and your service business moving forward, it's important to have a system in place for collecting unpaid invoices—and for preventing overdue payments in the first place. 🛠

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In this article, we'll cover:

Let’s dive in!

What causes clients to not pay?

If you’re trying to collect from clients who won’t pay, it can help to know why they’re not paying. For example, your client might be having cash flow issues. If so, they’re likely making strategic decisions about who to pay and when, and unfortunately, your invoice might not be at the top of their list. 😕

On the other hand, your invoice might be buried at the bottom of your client’s inbox—or in larger organizations, lost in a sea of paperwork. 🌊 Your client could even just have the wrong payment due date on their calendar.

No matter why your clients aren't paying, it's important to show patience and understanding. You can also do your part to help clients remember to pay on time in the first place—but more on that later. 💡

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How to stay calm when clients don't pay

While no small business owner wants to experience cash flow issues, late payments just happen sometimes. In these situations, it’s crucial to stay calm and avoid panicking. 🙏 If you’re overwhelmed with stress, it will be much harder to handle non-paying clients.

Remember: Unpaid invoices aren’t always an emergency. Before you panic, take these three steps to understand how overdue payments will impact your business’s financial health. 💵

  1. Review upcoming expenses: Do you have any major expenses coming up? Or will the business be okay if cash flow is slower than expected for a few days?

  2. Review your accounts receivable: See if you’re expecting payments from any other clients. Can you give them an incentive to pay early? This can help keep your budget on track while you wait on overdue invoices. 💸

  3. Check your emergency fund: Saving as a business isn't always easy, but it will keep your business running if clients pay late. If your client doesn’t pay for an extended period, you may need to tap into this fund.

It’s important to set strict boundaries with clients who aren’t paying. However, sometimes clients are truly struggling with cash flow. If you have a good relationship otherwise, these steps will help you decide if you can offer a more flexible payment schedule—or if you’re dealing with a true cash flow crisis.

An online banking and money management platform like Relay (that’s us! 👋) can help you respond faster if clients pay late. For example, with Relay, you can open multiple free business checking accounts for different types of expenses. At a glance, you’ll be able to see how much cash is left in your accounts for each category—allowing you to make more informed decisions, faster. ⚡️

How to collect money from clients who won’t pay

If you’re dealing with clients who won't pay, the most important thing is to take action quickly and decisively. This will show your clients that you take overdue payments seriously—and it will also help you get the money you're owed sooner. 🙌

Here are 10 ways to collect from clients who won't pay, with each strategy escalating in intensity. 

#1: Send a reminder email right away

If your client hasn't paid, don't wait for them to make the first move. Within 24 hours of the invoice due date, send a friendly reminder email to your client. 📧

This should include a polite yet firm message that reminds them their payment is past due and requests they pay as soon as possible. You should also resend the original invoice as an attachment to this email or via your accounting software.

In your email, avoid using accusatory language. Your client might have forgotten about the invoice, but most likely, they didn’t have bad intentions. Here’s a quick example to help you write your own payment reminder:

Subject: Invoice #12345 is Now Overdue

Dear [Name],

I hope this message finds you well. I wanted to follow up about invoice #12345 (attached here), which was due [date] and has yet to be paid. Would you kindly take a moment to review it and let me know when I can expect payment?

Thank you!

[Your Name]

#2: Follow up with a phone call

If your client hasn't responded to the first email or if they're more than three days overdue, it's time to follow up on the phone. This is a chance to address any invoice questions and get the payment process back on track. ✅

During the call, do your best to remain friendly and professional. If you have a good relationship with the client, you won't want to damage that by being too pushy or demanding.

#3: Contact the billing department directly

If your client didn't respond to steps 1 or 2, they could be "ghosting" you. 👻 In other words, they may be ignoring your efforts to reach out as a way to avoid payment. Whatever you call this behavior, it’s a serious issue for your business.

In this situation, you can try contacting the company's billing department. You may be able to find their information via your client's website, social media accounts, or past email communication. 🔎

If your client did answer your call or respond to your email—but they don't seem to know why the payment is late—ask them to connect you with the billing team. The client's finance department will likely take your payment issue more seriously. They should also be able to answer any technical questions about the status of the payment.

💡 Tip: No matter who you're speaking to, be sure your communication is clear, direct, and professional. It's also a good idea to ask specific questions like, "By what date can I expect payment?"

#4: Pause or cancel future work

If none of the steps above have worked and your client is still not paying, it's time to take more serious action. If you're in the middle of a project with this client, pause or cancel future work. Whether you’re a freelancer or a business owner, it’s never a good idea to work without being paid. 💸

Before you take this step, just be sure to notify your client in writing and explain why you’re stopping work. This will protect you if the client tries to claim you didn't finish the job as agreed.

#5: Offer a payment plan

If the unpaid invoice is due to a cash flow issue on your client's end, you might need to offer a payment plan. Maybe you can allow your client to pay the amount owed in multiple installments. Or, you could ask for a partial payment now and give them an extended due date for the remaining balance. 📆

To make a payment plan effective, transparency is key. Outline the exact number of payments and their deadlines. You might also want to set up automated reminders or direct debits to prevent missed payments. Ultimately, this will improve your chances of recovering the total amount.

#6: Offer an incentive for payment

Another way to motivate your clients to pay on time is to offer payment incentives, like discounts or one-time bonuses. 🤑 This may be particularly effective if the outstanding invoice is for a large amount.

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For example, you could offer a 15% discount if they make a payment within 5 days. Or you might give them a free bonus with their next purchase if they settle the invoice within 10 days.

💡 Tip: Be sure to communicate that your incentive is a one-time offer due to unique circumstances. Otherwise, clients might purposely delay future payments to get another discount.

#7: Send a formal demand letter

If the above steps haven't worked, you might be wondering how you'll ever be able to collect from clients who won't pay. By this point, your client's invoice might be 30 to even 60 days overdue. 😩

If your client hasn't agreed to a payment plan, accepted an incentive, or offered a timeline for repayment, it's time to send a formal demand letter. This document serves as a last attempt to settle the debt before escalating the matter legally. 🏛️

The letter should include:

  • A clear statement of the outstanding amount owed

  • A detailed breakdown of services rendered or products provided

  • Any payment history or previous attempts at collection

  • The consequences of non-payment, including potential legal action

  • A firm deadline (usually 15-30 days from the letter's date) by which payment should be made to avoid further action

  • Instructions for how to make the payment

Some states have demand letter templates, like this one from the California Courts website. A template can help you get started with the letter, but to show the client you're serious, you may want to hire a lawyer to draft and send the letter on your behalf. 💼

💡 Tip: Regardless of who sends the letter, it's important to send it via certified mail. This ensures you have proof that the letter was received by the client.

#8: File a case in small claims court

If your client still fails to pay after receiving the formal demand letter, you may want to consider filing a case in small claims court. This court is designed for disputes involving relatively small amounts of money. In the U.S., the limit varies by state but typically ranges from $2,500 to $25,000. 🏛️

Before you pursue this option, ensure that the overdue payment is worth the time, effort, and cost associated with a lawsuit. Always consult with a legal professional so they can evaluate your case and guide you through the small claims court process (if you decide to go through with it).

In many business contracts, a clause is included that outlines the process of dispute resolution. Often, these contracts will say the parties should attempt arbitration before legal action. 📜

Arbitration is a dispute resolution method where a neutral third party makes a binding decision. It's like a court trial but less formal and faster. To start arbitration, you'll have to send a notice to the client expressing your intent. After that, you and the client will select an arbitrator and engage in an arbitration hearing.

If arbitration is unsuccessful, you may choose to file a lawsuit against your client. This is a significant step that involves a lot of time, energy, and money—so be sure you talk to a lawyer before you move forward. 🏛️💼

#10: Hire a debt collection agency

If you still can't collect on the unpaid invoice, your last resort may be to hire a debt collection agency. This is a company or agency that specializes in recovering unpaid debts and other delinquent payments. 💸

A reputable debt collection service uses legal tactics to motivate clients to pay their outstanding balances. The main advantage of using this option is that you don't have to invest much time or energy into the process. You simply hand over all documents related to the debt and let the agency take it from there.

However, one potential downside is that debt collection fees can range anywhere from 15-50% of the amount due, depending on how quickly they're able to recover your money. 💰

💡 Tip: Be sure to research and vet multiple debt collection agencies before hiring one. It's always a good idea to check references, read reviews, and compare rates from different services.

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How to help your clients pay on time ✅

Now that you know how to collect money from clients who won't pay, it's also important to avoid late payments in the first place. The preventative measures outlined below will not only save you time and money but will protect your business from future cash flow crises.

📄 Set clear payment expectations: Your payment terms should be outlined in all contracts. However, some clients won't read the contract closely, so be sure to communicate payment details in other ways—for example, during an onboarding call.

📧 Send invoice reminders before the due date: Send an email to remind clients one week before their invoice is due. This will help ensure they have enough time to make the payment. Some accounting software will even allow you to automate reminders.

💰 Take payment upfront: Whenever possible, take a deposit upfront or require full payment before you start working. This ensures your client is fully invested in the project and will prioritize getting it done on time.

💵 Charge late fees: Late fees should be clearly outlined in your contracts and invoices, so clients know exactly what to expect if they don't pay within the specified time frame.

💳 Accept multiple payment methods: Your clients might want to make an online payment with a credit card, send a wire transfer, or use PayPal. When you offer more payment options, you’ll make it easier (and faster) for clients to pay.

The bottom line

Recovering money from clients who won't pay can be one of the hardest parts of running a marketing agency or small business. Thankfully, there are many steps you can take to get the money you’re owed and prevent late payments in the first place.

With Relay, you can get more visibility into cash flow, so you’re prepared for anything—including overdue invoices. 🙌 Whether you want to open multiple free checking accounts for different types of expenses or earn interest on your emergency fund, Relay can help. Sign up for Relay here. 😎

FAQs: How to collect from clients who won't pay

Still have questions about getting your unpaid invoices...paid? These FAQs will help you learn even more about collecting from clients who won’t pay. ⬇️

What can I do if a client consistently pays late?

If a client consistently pays late, it's important to communicate with them directly and professionally. Let them know that timely payments are necessary for smooth business operations. You can also consider implementing late fees for overdue payments or requiring pre-payment for future services.

Yes, it's legal to charge late fees for overdue invoices, but you must state this policy in your contracts and invoices. The amount you can charge may depend on your location and local laws, so it's recommended to consult with a legal professional.

How can I find a reputable debt collection agency?

Look for agencies that are accredited by professional bodies, like the Association of Credit and Collection Professionals (ACA). You can also read reviews, check the agency’s success rate, and ask for references. Always confirm that they use legal and ethical methods to collect debts.

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