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One challenge of running an agency or freelancing business is dealing with unpaid invoices. While this should be a pretty basic process — do the work, send an invoice, get paid — it is often a sticky subject.
Depending on your personality, you may connect with clients on a personal level, which can make it hard to dog them for unpaid invoices. Even if everything is professional from the get-go, there will almost always be the odd client who forgets or refuses to pay.
So, what do you do when a client won’t pay an invoice?
Read on to learn your rights and responsibilities around collecting on money that is owed to you. We’ll also talk about processes to make sure unpaid invoices don’t become a problem, so you can focus on how to get more clients.
How to Collect Payments on Time (and Avoid Unpaid Invoices in the First Place)
Part of the role of an agency owner is to handle the books. Issuing invoices and collecting payments are a core function of that role. Not only do invoices have to be paid, they have to be paid on time.
To avoid the hassle altogether, some people stick to using freelance platforms instead of running their own business. However, is paying 20% of your earnings to an intermediary like Upwork or Fiverr worth it?
There are a lot of measures you can take at the front of this process to avoid a hassle-heavy collections process. Here are the key factors to keep in mind and plan for.
How to Avoid Unpaid Invoices
First, avoiding unpaid invoices and late payments altogether is kind of the dream. The goal is that you would always have clients who pay on time.
While this may be an unrealistic dream, you can get a lot closer to that goal if you only choose to work with qualified clients. Getting your first clients, you may be tempted to take on anyone. That’s a mistake that can lead to a bad experience for both you and the client. Have an ideal client in mind and do your research to avoid working with unreliable people in the first place.
After negotiating rates with a qualified new client, it’s important to have clear expectations.
Directly on your submitted invoice should be the terms for payment timeline, and a clear detail of the penalty that will occur if it isn’t paid within that time. Remember, you can only enforce what you’ve communicated.
Another simple way to avoid unpaid invoices in the first place is shifting to a subscription model with automatic billing to a credit card. Also called a productized service, this can work for almost any agency, from bookkeeping to consulting to design services.
If you offer ongoing monthly services, consider making it a standard practice to set clients up for recurring payments. Using invoicing software like Stripe or Freshbooks, this is pretty easy to set up. The best part is that payments go through every month, without you having to do anything.
Have a Transparent Contract With Clear Pay Dates
Having standard client contracts is something you should think about from day one of starting an agency. It’s an essential step in client onboarding.
A clear contract will make sure you and the client are on the same page and there’s no confusion on the services that were promised or the terms of payment.
Before you even get to signing the contract, clearly state your payment terms as part of writing your business proposal.
The contract a client signs should include the standards for accepted payment methods, invoice cycles, and payment dates. For instance, you may have a specific payment portal that a client needs to set up. That should be part of their onboarding.
Then, you should clearly communicate when they expect to receive an invoice from you each month and when that invoice should be paid by. Incorporating this into the early days of your relationship will go a long way in creating habits that offset the risk of unpaid invoices.
Just as much as you want a client to pay you, it’s important to have your ducks in a row with billing. If you tell clients that you will invoice on the first of each month, then you need to invoice on the first of each month.
Consistent invoicing sends the message that you are operating in a professional way and keeping your end of the bargain in terms of dates and timelines.
Enable Online Payments
Make it easy for clients to pay you. There are plenty of online options for securely invoicing and getting payments from agency clients. In almost no scenario should you demand paper checks.
Especially if you do business with clients from around the world, having a very easy and reliably secure online portal for payments is a major plus.
Set an Unpaid Invoice Reminder
Even if unpaid invoices are sometimes unavoidable, you don’t want to have to go chasing them down. Ideally, if you have online payments set up, you can create automated reminders. Most invoicing software has the option to follow up automatically.
Make sure you have a plan for issuing reminders about late payments and late fees if you don’t have this automatically in place.
Create Late Payment Charges
Speaking of late fees: have them and enforce them. Some clients literally just forget to pay you or don’t prioritize paying you.
Money talks. Instituting reasonable and enforceable late fees or late payment charges incentivizes clients to pay on time.
How to Collect Money From Clients Who Won’t Pay
If you have a consistent process and standards for invoicing, you shouldn’t have to deal with this too much. But if it does come up, you need to have protocol in place for how to deal with a client who won’t pay.
Hopefully, they just forgot or are dragging their feet. Sometimes, however, you need to turn up the heat. Here’s how you do that.
Follow-Up on Unpaid Invoices Professionally
As a top priority: remain professional. Do not discuss late payments in an emotional or casual way. Do not get into the nitty gritty of a client’s finances or why they’re not paying you. Unfortunately, this is the one arena in which you must be all business. This is, after all, your agency and your income.
Don’t let people off the hook and don’t let your feelings dictate your responses. Follow the protocol you’ve set in place and don’t overreact or underreact. Pursue the client and get paid.
Change Contact Method
If a client has started to ghost you after not paying, your first line of defense is to contact them in a different way. Don’t keep texting or emailing if they aren’t responding.
If possible, get them on the phone or send a calendar invite for a video call. You want them to have to confront you as a real person and put the pressure on them to make a payment.
Change the Tone of Conversation
Even if all of your clients feel like friends, they aren’t. They are clients who owe you money for services rendered.
You absolutely don’t have to become rude or insulting when you are trying to collect payment for unpaid invoices. You may, however, need to make it very clear that this is all business and you mean business.
Make it clear that you are fully willing to move into a realm of legal action if invoices aren’t paid. If you’ve delivered on your end of the contract, you deserve the money and they are obligated to pay you.
Send Them an Official Unpaid Invoice Letter
If a client either won’t respond or continues to refuse payment, you need to move into official channels of communication. The first of these is to send a certified letter that notifies them of their unpaid invoice. This is fairly simple to obtain. You may get it notarized.
An official unpaid invoice letter sends a clear message of what the client owes and what’s to come if it is not paid within a designated time frame.
This is important because your legal options to collect have a statute of limitations. Your success may depend on having a dated record of your attempts to collect.
Start Legal Action For Non-Payment of Invoices
If all of your efforts have gone unnoticed, you may have to seek legal counsel. While rare, it may be worth your while to commence legal action and sue your client in small claims court.
In the US, non-payment of invoices can be brought to small claims court for a relatively simple and effective resolution. Depending on how much money they owe, this procedure may be worth the effort.
There are limits to how much you can collect through small claims, however, and it varies by state. For example, the maximum claim in California is $10,000 for an individual and $5,000 for a corporation.
Last Resort: Take Unpaid Invoices to a Debt Collector
The last and most extreme step you can take is to hire a debt collector. This will make a client’s owed payment truly official and give you third-party support for collecting payment.
Debt collection agencies typically get paid based on what they are able to collect. They can take a fairly large cut of the amount paid, up to 50%, and they are known for high-pressure tactics. If it’s truly a question of getting nothing or getting a partial payment, you may want to consider this route.
Being in business for yourself requires you to become a jack of all trades. One of the skills every agency owner has to develop is issuing and collecting payment for invoices.
Having a solid standard in place, reliable protocol, and maintaining good client relationships will mitigate the risk that you ever have to pursue many of these steps. But, if you do, this guide is a good place to start.
For more on the skills and processes I used to build a thriving agency, check out the video course below.