How to manage overdue invoices
Making sure that invoices are paid on time is essential for businesses to succeed. However, most businesses will occasionally encounter a frustrating reality: late payments.
If you have an overdue invoice, there are a few things that you can do to get paid quickly. There are also laws and regulations in the UK surrounding overdue payments and charging interest as a late fee.
This article outlines what you can do in the event of an overdue invoice and how to avoid that situation in the future.
Nobody’s perfect, and there are times when the customer may have simply forgotten about the invoice with their busy schedule. As soon as the invoice is overdue, sending a friendly payment reminder email might just be enough for the customer to realise their mistake.
If, however, the payment is severely delayed, or this is a regular occurrence for this customer, you can send follow up reminders with a more serious tone.
For instance, a friendly overdue invoice letter could be:
“We want to inform you that we have not received the payment for the invoice below. We would be very grateful if you could issue the payment as soon as possible. Thank you very much for your help.”
And to follow up, a more serious payment reminder letter could be:
“The invoice listed below is still not paid. Please remit payment immediately, otherwise, we will have to take further action.”
Although payment terms are not mandatory invoice information, it’s beneficial to add them to your invoices so that your customers know exactly how and when to pay.
Payment terms provide clear and detailed information on how the customer should pay the invoice. They may also include information specific to that particular sale, like a cash discount for early payments or possible late fees that may be incurred.
Payment terms can be listed anywhere on the invoice, however, we would recommend adding this information at the bottom under the item lines and totals. Regardless of the location, make sure that it’s clearly visible.
In the UK, it’s not required by law to include a due date. However, most professionals would advise you to do so and most invoicing software will automatically include this field.
If no due date is stated on the invoice, then under UK law, the customer must pay the amount due within 30 days from the date of supply.
Including a due date and payment terms makes it clear to the customer their payment obligations.
If you regularly have overdue invoices and have exhausted all other options, you can charge interest for late payments. In the end, you have a right to get paid on time for your work.
The late payment legislation in the UK outlines when and how you can charge late fees or interest. The process differs for business to business (B2B) transactions, and business to customer (B2C) transactions.
For B2B sales, the UK Government states that you can charge interest for late payments at a rate of 8% of the invoice total plus the Bank of England base rate. On top of that, you can also charge a fixed amount on top of the interest which varies based on the invoice total but is usually between £40 - £100.
For B2C sales, there are no official legal rules on charging late fees. You can set your own fee, as long as it is fair and clearly stated on the invoice.
The late fees should be entered in the payment terms section of your invoice and should clearly state how much, or what percentage you charge for overdue invoices.
If you don’t want to charge interest or late fees but would like to minimise the risk of late payments, you can offer additional payment options. It's been proven that invoices get paid significantly faster when online payment options are offered.
For that reason, you should think about using an online payment provider, like SumUp, to offer secure payment links to your customers.
Learn more about getting paid via online payments here: “The advantages of online payments for your invoices”.
Similarly, if appropriate for your business structure, you could offer automated payment methods, like standing orders or direct debits. This will ensure you receive payment on time with minimal work for the customer.
Alternatively, you can ask for payment upfront. This would be helpful if you have a customer who regularly pays late, to ensure that you can continue having a business relationship with the client without affecting your cash flow.
There may be times when you find a very old unpaid invoice or simply can’t get in contact with a customer who still owes money, and are now wondering how long you can chase the payment.
In the UK, the Limitation Act 1980 states that you can pursue unpaid debt up to 6 years from the date the product or service was provided.
However, as a business owner, you should determine if it’s worth the time and cost of chasing the payment if it's been overdue for several months or years.
If you’ve exhausted all other options and have not received payment or cannot get in contact with the customer, you can cancel the invoice. Once you have come to terms with the fact that payment will not be received, you’ll need to correctly record this for your accounting records.
Cancelling an overdue invoice should be done by issuing a credit note. This essentially cancels any payment due on the invoice and balances your books to show that you have no outstanding debts.
Invoicing software, like SumUp Invoices, can help you easily keep track of your unpaid invoices and follow up with any that require attention.
Invoices and payments are centralised, so you’ll always have a full overview of your business finances, on any device. You can also add a payment link or QR code directly to your invoices to offer your customers a seamless, secure online payment method.
SumUp Invoices can also help you add payment terms to your invoices, and if necessary, issue a credit note to cancel a sale.