SMBs bear the brunt of late payments, which hit hard on the underpinning functionalities and success of organizations.
As facts are best told in numbers, here is a survey conducted by Marketvoice on every aspect of invoices for small businesses. The results of this survey are based on data collected from over 80,000 invoices issued to different companies in nearly 90 countries.
The key facts derived from this data are:
- 62% of invoices are paid late
- 1/3rd of the invoices are paid more than two weeks late
Find below an image that shows the amount of delayed payments made to companies from different sectors.
Is there a way to tackle this challenge effectively?
Though different types of invoices exist, the past due invoice helps initiate the process of getting the past due amount from customers.
Let us understand past due invoices.
What Is a Past Due Invoice?
A past due invoice is an important part of small business invoicing. It is an official document reflecting the billing statement that refers to the amount that has not been paid within its due date. Typically, SMBs implement a structured process of sending invoices for services to their clients. They usually have online invoice software in place that sends invoices with details of the payments.
If the due date lapses, the invoicing tool automatically triggers a past due invoice with details about the overdue payment and any penalties for the time lapse.
When Is a Past Due Invoice Needed?
Usually, in SMBs, projects are finalized, developed, and delivered in advance. They are either paid for in installments with the ongoing work or after completion. Clients begin using the product, experience its advantages and clear payments from the profit they obtain. This is not due to the lack of trust in the service/product provider, but because clients are not always equipped with heavy funds.
In this scenario, service providers seek the help of online invoicing software that maintains accounts of payments received and those that are due. If a client fails to pay up and the time period provided lapses, the invoice software immediately sends out a past due invoice as an alert.
Who Past Due Invoice Can Help?
Though freelancing has its own benefits, freelancers frequently experience the pain of not being paid on time. They can use the past due invoice to inform their clients that they have a payment due.
A past due invoice helps freelancers convey to their clients that they need to arrange funds for overdue payment. This invoice may also include extra charges for late payment, if applicable.
In a retail set up, managing inventory is one of the most challenging tasks. A retailer ideally places an order for the products from the wholesale provider and begins to distribute them. A partial payment is made for the products received.
In this case, the wholesale provider may find that payments are pending and the due dates have lapsed. He may send out past due invoices to inform the retailer about the past due amount.
Purpose of a Past Due Invoice and Its Role in Collecting Payments
Past due invoices also help in collection of due payments in a streamlined manner. This procedure includes the following steps:
Reconfiguration of Payment Terms
A service provider may advice the client about making full or partial payments within a given time. He may also reduce the time provided for the payment or charge a penalty for the late payment.
Checking for Errors
An error-free invoice may help speed-up invoice approvals, facilitating faster payments. This may involve a third-party to proofread invoices and check for errors.
Review of Credit
This includes reviewing the financial position of the customer if a medium-to-large credit request has been made. This review shall include an examination of the client’s financial statements and credit reports.
What Information Needs to Be Present on a Past Due Invoice Template?
- Invoice number
- Invoice date with payment due date
- Customer/service provider name and contact information
- Detailed split-up of services rendered, including dates, descriptions, man-hours involved, manpower invested and applicable charges
- The subtotal and total of the amount to be paid
- Specific payment methods accepted
- Terms and conditions for early or late payments, if applicable
What to Expect after Sending a Past Due Invoice?
Past due invoices harm the credit of any particular individual/company. Service providers may reduce the credit limit or even stop accepting project proposals.
Long-standing past due invoices are eventually directed to collection agencies. This may result in a permanent discredit on that particular company, leading to other service providers limiting their business association.
A service provider may alert the customer and request a payment multiple times after sending a past due invoice. If the customer fails to revert, such invoices are directed to collection agencies.
These are the steps undertaken after issuing the invoice:
1. Sending a Dunning Letter
This is a low-key reminder message that conveys the amount due, invoice number, and invoice date.
2. Reminding over Call
If a dunning letter does not receive a response, a personal phone call is facilitated to know the status of the payment.
If the service provider is not able to speak to the concerned person over call and doubts the intention of the customer, the provider may escalate to the accounts or senior management.
4. Setting up a Payment Schedule
If the customer is in a financial crisis, the service provider may help by breaking down the payment into installments and scheduling it. However, this is backed by a personal guarantee for the payment from the customer’s side.
5. Taking Legal Action
If these attempts fail to obtain the payment from the customer, an attorney letter may be hired to issue further warnings.
6. Filing an Involuntary Bankruptcy Petition and Suing the Customer
If the service provider finds that the customer has not cleared payment dues for other companies as well, he along with these companies may together file a bankruptcy case and initiate legal procedures accordingly.
It should be noted that the first few points are modest efforts to get payments from the customer while attempting to pursue a cordial business relationship. The remaining aspects focus on simply getting the due payments based on the virulence of the situation and may result in the discontinuation of the business association.
Past due invoices play a pivotal role in the payment cycle. They help service providers remind their customers about pending payments and that they need to arrange funds within a stipulated time to avoid functional hiccups.
The incorporation of effective online invoicing software can ease payments collection by triggering past due invoices, when required. Have you implemented one to manage your payments? Do share your experiences with us in the comments section below!