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    Tuesday
    Mar262013

    How do I collect a past due invoice?

    If a business extends credit to its customers, it is likely to experience situations where it must collect a past due invoice. There are a multitude of steps available for doing so. The collection process really begins before an invoice is issued to a customer. Consider the following:

    • 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.
    • 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.
    • 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.
    • 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.

    A selection of the best options for collection subsequent to invoice issuance are noted below, in increasing order of severity.

    If you wish to maintain a cordial relationship with a customer, it is best to confine yourself to the items earlier in the list. If you simply want to be paid, and do not expect or want a long-term relationship, then the more aggressive techniques later in the list may be what you need. They are:

    1. Dunning letter. This is a reminder letter (or fax or e-mail) that states the amount due for payment, the invoice number, and the invoice date. It is intended to be a low-key reminder.
    2. Phone call. 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.
    3. Inform the sales staff. Your sales department may be able to work back channels at the customer to obtain payment.
    4. Escalate. 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.
    5. 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.
    6. Accept the return of merchandise. If the customer still has whatever you have sold to it, then arrange to have it returned.
    7. 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.
    8. 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.
    9. 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.
    10. Sue the customer. This 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 assets before authorizing a legal battle.
    11. 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 backruptcy procedures, but it may allow you to get back a small amount of the original account receivable.

    The first six of these points are relatively modest efforts that any company will likely engage in with its long-term customers. The level of virulence increases considerably thereafter, so that the later items are really only to be engaged in if you are willing to stop all further sales with a customer.

    Related Topics

    The administrative collection call
    Collection call preparation
    Collectors as bottlenecks
    On-line credit applications
    What is a dunning letter? 

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    Reader Comments (3)

    I have once had the issue with overdue invoices, I had spent quite some time to no avail, basically what happened was that the company (my customer) had changed ownership (though it is still under the same legal identity), but the boss refused to pay, I had even engaged third party debt collectors and it did not work out either. Any advice on cases like this? given the fact that going for legal would cost way more than the due amount. thanks John

    June 3, 2011 | Unregistered CommenterJohn

    I have had this type of problem with my customer but at the same time I have received an Excess or twice payment from customer and instead of paying back this money I adjusted that excess payment with the old invoices.

    June 11, 2012 | Unregistered CommenterGaurav

    My contracts are very explicit when it comes to payment terms. It clearly states: no paid-if-paid or rentention clauses accepted (construction industry). However, my customers ignore this. When we invoice from contract it clearly states that a 1.5% penalty will be assessed and we will also add any legal fees to the bill. This annoys the customer and they NEVER pay it. Too bad the court systems wouldn't accelerate these issues so the small businessman can get back to work and make money instead of drawing out the process. It is totally unfair to the party owed the money!

    April 16, 2013 | Unregistered CommenterSteve
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