Chasing Debtors and Getting Overdue Invoices Paid - The Definitive Guide

Asking locally and following these basic steps will help create a better picture of the customer you plan to take on.

1. Ask your team or other people in the industry you know: does anyone have any experience with this customer?
2. Check the Companies Office Registrar to find out when the company was registered and who owns it – a simple search of the company will reveal when it was registered, where it’s based, who the directors are and who the ultimate owner is. You can also see what other companies the directors are involved with. If then you see “in administration” or “in liquidation” on related entities this may be a red flag and may suggest the company you're dealing with is related. A company search gives you a starting point for deciding on whether to take on the customer.
3. Look for customer complaints – a quick Google search of the business name should bring up its address and a Google Business listing. You may see reviews (marked by the a range of gold stars) and if you do it’s worth reading them. If not, search for "business name + complaints" to see if anything comes up.  
4. Do a Linkedin search – check out the person on Linkedin. You’ll need to be a member to see information so it’s worth joining. Their work history is the most important. 
5. Look at their Facebook page - are there complaints? What is the review rating? Does the page speak to its customers, and what date was it established? Is it regularly updated?

By sense checking the business, you are really asking if the company you plan to work with "makes sense". Specifically, does the business sound like something that would be profitable? Does it provide a service that would actually find a customer? You have the right to ask what the business does; here are three recommend questions to ask the business owner/contact:

• How long have you been in business?
• Who is your largest customer?
• What is your primary business service or product?
• Does the business have a local office, or is it based in another country?

​Standard terms in New Zealand are 30 days. Most companies pay accounts on the 20th of every month. Don't back down if you believe 30 day terms are reasonable. Customers may say their payment terms are 60, 90 or even 120 days but you do not need to agree to this. If they're serious, they will agree to the terms. 

It’s essential to know when you can expect to be paid. The New Zealand standard is for payments to be made on the 20th of every month, but this tends to be for larger companies. Small and medium sized businesses tend to pay sporadically; this could be daily, weekly or whenever they want. For this reason, it’s very important to document the payment cycle and use this for later reference if your invoice remains unpaid. 

Deposits are perfectly reasonable in industries such as creative, professional services, construction and health. Don’t risk being caught out by non-payment or late-payment. If you have solid credit standing yourself, meaning there is little risk your own business will fail in the short term, you can consider asking for a deposit on a case-by-case basis. Don't be afraid to do this - if customers are serious, they'll pay upfront. Not all industries conform to deposits, but it's worth a shot if your customer says they're serious. 

You can also break up the project into milestones, accepting 10-25% per milestone completed. This helps your cashflow while delivering the goods or services to the customer as promised. ​

​If you have a purchase order from the company, there can be no disagreement later about the order lacking “approval” or “authority”. Your purchase order is confirmation that the company has engaged you. Without it, they can always say they didn’t engage you and therefore deny payment. 
​

Don’t refrain from telling customers when your money is due. Use big letters and numbers, with sections like “PAYMENT DUE 30 DAYS FROM INVOICE DATE” and “LATE PAYMENT TO BE PRE-ADVISED”. If a payment is going to be late, make it clear you need to be notified. If you don’t get paid on time, then your customer is already on the back foot and you’re well within your rights to passively chase it from day 1. You can suggest a payment plan (see more below) if full payment is no longer an option.
 
To ensure steady cashflows, we recommend having multiple payment options available on the invoice:

1. Always accept cheques (a surprising amount of companies only pay by cheque), even if it’s a nuisance to process and bank.
2. Always make your bank details clear, naming the bank you’re with for added trust (i.e. state something like “We’ve banked with Kiwibank since 2009” to convey a local presence and goodwill).
3. Try to accept credit card payments, i.e. with a payment system such as PayPal and Stripe. Customers are often low on actual cash, and/or find electronic payment a lot easier. An invoice that accepts online payment will often be prioritised above one that won’t. 

Don’t sit around waiting, issue an invoice as soon as your goods or services have been provided, or before if you’re asking for a deposit. Time is money, and waiting to send an invoice in most cases makes no sense at all. Email, express mail or drop it off in person - whatever you need to do, do it as soon as possible. 

Many utilities do it, but early payment discounts can be popular if you need invoices paid as soon as possible. Something like 5% is reasonable, and it’s usually easy to handle early discounts on your accounting system. You can selectively use the discount too – it doesn’t need to apply for every customer, just the ones you want or need to pay on time. 

Don't be left in the cold under a pile of invoices. Establish a relationship with your Customer contact as well as the person paying your invoice - they are often different people unless it's a sole trader. A direct email is the best way to sort things out - if your invoice is sent to your contact, he or she will have to forward it to the person paying it. Avoid the hassle and risk of late payment by confirming the contact details of the person who controls the purse.

When your business offers credit for the payment of goods or services, you’ll need to have a robust set of terms and conditions to be protected should payment drag out. By having a clear set of terms and conditions, you and your customer understand their rights and obligations. Essential terms and conditions include:

• Trade terms (30 days, 60 days)
• Interest rate on late payments (e.g. 5% above the OCR)
• All debt collection fees incurred by hiring a third party will be paid by the customer. 

Q: What kind of “terms and conditions” should I have for trade credit?
A: Terms and conditions must cover issues such as trade credit, specifically covering issues around invoices, payments and debt collection. Specifics on credit limits and the ability to cancel any agreement should also be included. The more specific your terms are, the less misunderstandings you’ll have later on should there be an issue with payment.
 
A watertight template that sets out credit account terms and conditions is a good starting point if you haven’t formalised credit terms in the past. Your terms and conditions run alongside the terms you have for the sale of goods or services to provide extra protection.

Q: What do I do if my credit terms are breached?
A: If a customer fails to pay you on time or breaks the terms and conditions, you can contact them to notify them of the specific breach if you want to "get legal". However, in most cases it's much friendlier to simply send an email highlighting your invoice has not being paid within the set time and request acknowledgement of the balance overdue. Ensure you do this promptly and keep it friendly. Our chasing payment scripts below take you through an efficient process. 

The accounts payable team may be short-staffed, your invoice was accidentally overlooked and/or your customer is waiting for approval for payment from the CEO. Whatever the reason, don’t despair – just use the reminder emails (outlined below) as a first base for collecting money. Any mistake will be quickly remedied, resulting in your invoice being paid. 

Do you or someone in your office have a spare few hours? Investing in your business relationships is rarely done by small businesses, but it makes a big difference when it comes to customer retention and payments.

• Quarterly newsletter: Put together some news about your business, a useful 200 words about news in your industry and/or some tips for customers. You can write this in less than an hour and send it in seconds to your customers - invest in high quality and your brand value increases too. 
• Quarterly customer calls: This is very valuable but rarely done. Bunch up 5-10 customers and invest the time in calling them to ask if there's anything they'd like to say about your service, your product and if there is any way you can improve. Thank them for being a customer, and move on to the next name on the list. You can leave a voicemail thanking them too - this works almost as well.  
• Consider setting up a customer database with MailChimp or similar, which can save hours when it comes to managing customer contacts. 

​If you’re still running a desktop accounting system it may be time for a change. Creating invoices on a template, posting invoices, manually reconciling payments and working out GST can take much longer manually when compared to an online-based accounting system.  They tend to be quite easy to implement and the majority of users save time from day one - cash management and collection is also a lot easier.

What does this mean for debtor collection?
When it comes to chasing late payers, you want that process to be as painless as possible. A cloud accounting system isolates who your late payers are, and by how much, all in one click. This means you can turn your attention to the biggest and/or oldest debtors without sifting through a sea of papers. A cloud system will in all but unusual circumstances save a lot of time when it comes to debtor management. You will be able to send statements and re-send invoices in seconds, and have an up-to-date position of your accounts receivable 24/7. In summary, it makes collecting your money significantly easier. 

So, is a cloud accounting system suitable for your business?

Pros:

• Everything is digital and backed up by the "cloud". This means you can log in to your accounting system and retrieve invoices, see your P&L and tax liabilities. 
• Thousands of free tutorials exist to help you with any issue, and most cloud accounting systems have their own support. This means you'll save money on an accountant for basic things, and learn a lot in the process. 
• Sending invoices is instant, by email and you can have multiple payment methods including credit and debit cards making it easier to settle bills. 
• Most importantly for debtors management, you can view all of your overdue debtors on one screen (see the real life Xero examples below).
  
• Xero offers automated follow-up so you can remind customers when their invoices are overdue, and use different scripts based on how long the invoice is overdue. For example, 7 days overdue - friend, 14 days overdue - some urgency, 21 days overdue - threatening a phone call, 28 days overdue - talks about debt collection etc.

Cons:

• Ongoing costs – the platform in one way or another owns your data and you’ll need to keep paying to have access to it.
• Setup time - you'll need to invest a day or two to ensure everything is set up, bank feeds work and your invoice templates work. 

How Much?
Popular options include Xero, MYOB and ​Reckon One and fees start from around $20 + GST per month. ​

Schedule timely reminders, and be sure to use a friendly script:

• When to send: Twice a week, Tuesday and Friday morning are suggested times
• What to send: We have presented a suggested script below, which is proven to be effective. Please tailor it to your business needs. 
• Tip: For a late invoice, add the account manager’s email to the recipient listing so your email gets more than one person's attention - the more eyes on your overdue invoice, the better. 

Having a procedure for follow-up will save you a lot of time from day 1. Every month you may experience a customer, or a number of customers, making you chase the invoice in a game of cat and mouse. ​There is no need for that "game" to drag out. With a few simple practices, you can get paid quicker without the awkwardness. 

We suggest the following:

1. Send an email script (like the sample above) twice weekly after an invoice is overdue by 1 day
2. In the first week, call the customer and tell them you're chasing payment, and tell them the specific invoice number and amount, i.e. "INV-0402 for $789.50, due 20 March is now overdue".  If you get voicemail, leave the message on the voicemail. 
3. In the second week, if still not paid, call again twice, and summarise the issue in an SMS or message to the customer. Customers look at their phones before their bills, so being reminded of an overdue account on their phone isn't a great feeling. A simple script is "Hi <Customer Name>, we are awaiting payment for invoice #<insert invoice number>. Please note payment is now 2+ weeks overdue. We await payment with urgency. Thank you". 
4. In the third week, combine a mixture of all the above, and additional send an SMS via Skype using a simple script as in 3. above. Do all of these four methods in 10 minutes and you've covered all bases. Keep repeating twice a week until paid.

​With the customer getting multiple messages on phone, voicemail, SMS and email, there can be no excuse for late payment. 

​If you're reading this, chances are you have a debtor who refuses to pay. Fear not - the next step is to pick up the phone with urgency. With every call, be friendly and ask "yes" or "no". 

Handle yourself well on the phone to ensure the ball remains in your court, specifically following this guidance:

1. Ask questions that require specific answers – there’s no room to go off on tangents. This call is about money.
2. Speak clearly and don’t be afraid of long and awkward silences -You are not under obligation to talk.
3. Listen sympathetically, you’re likely to hear a sob story, but stay firm. For example:

Example conversation:
Customer: I can't pay you, we don’t have any money
You: Are you expecting payment?
Customer: Yes, but not for another week.
You: OK, next week you can part-pay the invoice. Let’s start with 30% of the amount.

Such a conversation can go in a number of directions, but you’ll need to remain upbeat and confident to extract payment. Anything you agree must be noted down and emailed after the call to affirm the agreement. You will then schedule a series of reminders as the payment date approaches – see our example below.

You will invariably hear a lot of excuses, and they never stop coming. Remain calm, don’t lose your temper and act firm – don’t say “that’s a lie” or “I don’t care”, but don’t accept excuses either. Your customer will be a bag of emotions, so work with them and offer part-payment if it’s unlikely you can collect all the money owed in one go. 

If you’re getting nowhere with an unpaid invoice, don’t give up. We've listed some specific industry suggestions, and this list will grow as we hear from more readers.

• Digital – if you provide hosting and haven’t been paid, simply provide a cut-off date – if your invoice was due 31st January and it’s now 31 March, state services will be cut off at 5pm on 10th April for example. Advise the customer to take backups, and of a re-connection fee. If the customer knows their website or file hosting will go offline, they are likely to pay very quickly.
• Creative Services - if you've supplied specific graphic work for a customer, you can notify them that ownership of the work only passes to the customer on final payment. This may not be true in all cases, but it's worth mentioning. 
• Service-based - it's more difficult to engage a debtor when a service has been provided and now the invoice is overdue. Examples include legal, accounting, public relations and other professional services. Still, stay committed and make regular follow ups. 
• Fast moving consumable – food suppliers are some of the hardest working individuals in New Zealand and given a duopoly in food retailing, big business arguably dictates to small business. Suppliers often find themselves in between a rock and hard place, and for this reason are best to establish a functional relationship with the accounts payable customer contact.

Have a procedure for follow up to save time. Every month you may experience a customer, or a number of customers, making you chase the invoice in a game of cat and mouse. ​This can include:

• Reserving two hours in a week to have sole focus on debtor management
• Hand-deliver overdue invoices to customers if they're in proximity
• Train an employee to manage the day-to-day accounts receivable process, including sending statements. This gives you a break from looking at what seems like a forever-static debtor list and lets you focus closely on overdue money. 

When the calls have fallen on deaf ears and you just want to be paid, it's time to be firm with direct and actionable threats. We've developed a script below with the help of a number of small and medium-sized businesses. You can edit it to your specific needs and email or post it. You can also hand-deliver it for added urgency.  

​There are many debt collection agencies around, all eager to take a slice of your invoice if the debtor pays. Many work on a “no win, no fee” basis but their fees can be high if the debtor does pay. They’ll chase on your behalf, and relentlessly pursue your customer until the debt is settled.

Working with a lawyer to recover your debt can be expensive – make sure you ask for all cost estimates up front. If you doubt the debtor can repay the debt, you are probably best not to engage a lawyer as you’ll be stuck with a legal bill if your invoice doesn’t get paid.
 
What do lawyers do?
In most cases, the lawyer will send a standard letter asking the debtor to pay the debt owed. The letter outlines the legal action and late payment charges, as well as interest charges. The letter usually requests payment within 7-10 days. If this does not work, a second letter can threaten insolvency – this means that the company can be wound up if payment is not made. This threat usually encourages payment. If not, you can decide whether or not to begin insolvency proceedings. If an application is successful, the business will be liquidated – you will share the assets amongst other claimants, so the assets of the company may not cover the debt you’re owed. If this is likely, legal proceedings may incur more cost than they realise.