How to collect a past due invoice
/A past due invoice is a billing that has not been paid as of its due date. If a business extends credit to its customers, it is likely to experience situations where it must collect a past due invoice. It is essential to do so, since not receiving payments on time can cause major cash flow problems. There are many steps available for collecting overdue invoices, as noted below.
Step 1. Reconfigure Payment Terms
Require payment of all or a portion of the amount due before delivery is made, compress the payment terms to fewer days, and/or state that you will charge late fees. Some combination of these items should accelerate the collection of cash.
Step 2. Conduct a Credit Review
Should you have granted credit to a customer to begin with? Any medium-to-large request for trade credit should call for the completion of a credit application, the examination of the customer's financial statements, and the review of a third-party credit report.
Step 3. Eliminate Shipping Errors
Does the company have a history of issuing incorrect or damaged products? If so, the collections effort will be much harder. Correcting these in-house problems will eliminate many collection issues.
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Step 4. Eliminate Invoicing Errors
Have a second person proofread complex or large invoices. Otherwise, customers are likely to hold up payment, even if the error does not involve the price stated on the invoice.
Step 5. Issue a Dunning Letter
This is a reminder letter (or fax or email) that states the amount due for payment, the invoice number, and the invoice date. It is intended to be a low-key reminder.
Step 6. Call the Customer
If a dunning letter elicits no response, then it is time for a person-to-person call to find out why the payment is not being made. You can then switch to a variety of tactics, depending upon what you learn.
Step 7. Inform the Sales Staff
Your sales department may be able to work back channels at the customer to obtain payment.
Step 8. Escalate the Customer Contact
If you cannot get someone in the customer's accounting department to authorize payment, you may have better luck if your CFO or controller contacts their counterpart.
Step 9. Set Up a Payment Schedule
If the customer simply cannot pay at this time, then set up a payment schedule for a series of future payments, preferably backed by a personal guarantee by the owner of the customer.
Step 10. Accept the Return of Goods
If the customer still has whatever you have sold to it, then arrange to have it returned.
Step 11. Issue an Attorney Letter
This is essentially a "nastygram" issued by your attorney, and on the attorney's official letterhead, warning of further consequences if payment is not made at once. This is a relatively cheap option, and can break free money from customers who do not want to be threatened by attorneys.
Step 12. Impose a Credit Hold
Do not allow the shipping department to send any more shipments to the customer, and make sure that the customer knows about this credit hold. This is a good option when you are the sole source of a particular product - the customer must pay up or it will be denied any further deliveries.
Step 13. Sue in Small Claims Court
It is quite inexpensive to sue a customer in small claims court, if the unpaid amount is not large. It may be sufficient to simply fill out the small claims court complaint form and send a copy to the customer, rather than filing it with the court.
Step 14. Sue the Customer
Starting a lawsuit is a last-ditch effort, and will be both prolonged and expensive. It also makes little difference if you win in court if the customer has no money. Consequently, prescreen customers to see if they have sufficient liquid assets before authorizing a legal battle. In many cases, it makes more sense to write off a receivable than to invest in a lawsuit that has a low probability of generating more cash.
Step 15. File an Involuntary Bankruptcy Petition
If a customer is not paying a number of its suppliers, you can band together with several others to file a petition to throw the customer into bankruptcy. This will initiate lengthy bankruptcy procedures, but it may allow you to get back a small amount of the original account receivable. However, the bankruptcy process will be protracted, so you may not receive any payments for a long time.