Unpaid invoices can disrupt your cash flow, strain client relationships, and consume valuable time and resources that could be better spent elsewhere.
You may find yourself at a crossroads as the outstanding bills start piling up, and the friendly reminders fall on deaf ears, contemplating whether to send those unpaid invoices to collections.
While there are pros and cons to consider, we’re here to help you learn how to send an invoice to collections if you decide it’s the only option.
Read on below to discover everything you need to know before sending an invoice to collections along with tips on preventing uncollectable accounts receivable in the future.
We aren’t just going to provide you with actionable advice, you’ll also gain access to the most intuitive accounts receivable automation software that can help you get paid faster while increasing your cash flow.
First things first - a brief word on unpaid invoices and the toll they take on your business.
Unpaid invoices represent a critical challenge for businesses, as they can significantly impact cash flow and overall financial stability.
This is a bill that has not been paid by the client or customer within the agreed-upon time frame, which is usually stipulated in the payment terms of the invoice. And, it can lead to a multitude of issues - mainly in the form of cash flow problems.
You may have been counting on that payment, and now, you’re faced with challenges in covering operational costs, purchasing inventory, or investing in growth opportunities. This is particularly true for small businesses or startups operating on tight margins.
Invoices may go unpaid for a variety of reasons. Sometimes, it’s a simple oversight on the part of the client, while other times, it may be due to disputes over the products or services delivered, financial difficulties faced by the client, or unclear payment terms on the invoice.
But, if you’re here reading this guide, there’s a good chance you are not confident in getting your invoice paid through communication or follow-ups. You’re at your wits end - and you’re wondering, can I send an unpaid invoice to collections?
If an invoice remains unpaid despite multiple follow-ups, businesses may have to consider legal action as a last resort. However, this can be costly and time-consuming, and it may damage the business relationship with the client.
So, can I send an unpaid invoice to collections? Let’s talk about the legal side of things, the impact on client relationships, and timing to help you determine if this is the best next step for you before we guide you through how to send an invoice to collections.
The first and foremost step is to be aware of the statute of limitations in your jurisdiction. This is the period during which you can legally take action to collect a debt. If this timeframe has passed, you might not have the legal grounds to pursue the payment.
Then, consider contractual obligations. Ensure that the terms of your agreement with the client were clear. Did they explicitly agree to the payment terms? Is there a written contract? Having a clear, written agreement can provide strong legal backing if you decide to move forward with collections.
You must also be able to prove that the product or service was provided as promised. This could be in the form of delivery receipts, work completion forms, or other relevant documentation.
Just because you can send an invoice to collections doesn’t necessarily mean you should. This can often cause irreparable damage to the relationship you have with the client in question.
It's essential to gauge the worth of the long-term relationship with the client against the unpaid invoice's value. Sometimes, it might be more beneficial to write off a small amount in favor of preserving a profitable relationship.
Taking aggressive action to collect a debt can sometimes backfire in other ways, too. Clients talk, and your reputation in the industry could be affected if you're perceived as too aggressive or inconsiderate.
So, explore other avenues before considering collections. Could you set up a payment plan? Would a stern, final reminder suffice? Sometimes, a face-to-face meeting can resolve misunderstandings and lead to payment.
One of the biggest determinants in whether you should send an invoice to collections or not is the invoice itself - how much are you owed, how long has it been since you sent the invoice, etc.
Generally, the older the debt, the harder it is to collect. If an invoice is only a few weeks overdue, your client might have overlooked it, or it could be stuck in their approval process. If it's several months overdue, the chances of collecting diminish.
The amount due should be taken into account as well. Is the amount significant enough to warrant the potential relationship fallout and the costs associated with a collection agency?
Sometimes, the effort and cost to recover small amounts aren't worth it as you’ll discover below when we talk about how to send an unpaid invoice to collections. That being said, let’s help you determine if it’s time - when do you send invoice to collections?
It's not a straightforward answer, but a combination of factors will guide your decision. If you've exhausted all internal methods, communicated extensively, and believe that sending the invoice to collections is your best recourse, then it might be time.
The decision to send an invoice to collections shouldn't be taken lightly. It requires a balance of legal, ethical, and business considerations. But, if you can’t think of any alternative measures, we’ll walk you through how to send an invoice to collections below.
It’s crucial to approach this this process methodically and professionally to ensure the best possible outcome. We'll guide you through each step of how to send an unpaid invoice to collections, helping you make informed decisions and prepare adequately. First things first - you need to find the right collections agency.
Just as with accounts receivable outsourcing, who you entrust your collections process to shouldn’t be taken lightly.
Your reputation is on the line, and you want to make sure they act ethically and professionally on your behalf. You also want them to get the invoice paid, of course! So, here are some things to consider:
Once you have chosen a collection agency, the next step is to prepare and provide all necessary documentation to strengthen your case. Here’s what you need to gather:
The debt collection process formally begins after you pass off your documentation to your collections agency. Understanding the sequence of events can help set realistic expectations and prepare you for the next steps.
The collection agency will start by verifying the debt’s validity. They'll ensure the invoice details are accurate, confirm the debtor's contact information, and validate the debt's legality.
They’ll reach out to the debtor through a formal letter to inform them of the outstanding debt and request payment. This letter typically outlines the debt amount, the original creditor, and a deadline for payment.
In an ideal world the debtor will pay your invoice upon receipt of this letter - it rarely works this way, though. Rather, this is when negotiations start. Your agency will negotiate on your behalf to discuss payment plans or settle for a lesser amount, depending on the circumstances and your prior agreement with the agency.
If the debtor does not respond or refuses to pay, the collection agency will persistently follow up. This could involve additional letters, phone calls, and potentially legal action if deemed necessary.
The agency may report the unpaid debt to credit bureaus after a certain period, affecting the debtor’s credit score. This is typically 30-90 days after the formal letter submission.
We know you came here learning hoping to learn how to send an invoice to collections to earn back the full amount your owed in a timely manner.
But, let’s set your expectations. This doesn’t always happen - in fact, it rarely does if you’ve gotten to the point of having to partner with a collections agency.
Instead, you may end up negotiating to settle the debt for less than the full amount. Evaluate the offer carefully, considering the age of the debt and the likelihood of full recovery. You may also need to accommodate the debtor with a payment plan. Ensure the terms are clear, and the agency closely monitors the payments.
We want to be clear with you - there’s a possibility that the debt may not be recovered. This could be due to the debtor's financial insolvency, incorrect contact information, or a dispute over the debt's validity.
If all else fails, you may consider taking legal action, though this is usually a last resort due to the time and costs involved. We advise you to maintain a professional demeanor regardless of outcome and work closely with the collection agency to determine the best course of action.
And, in future dealings, consider implementing preventative measures such as stricter credit policies, clear payment terms, and regular follow-ups on outstanding invoices to mitigate the risk of having to send invoices to collections.
Let’s quickly talk about how to optimize your invoicing process to avoid headaches like this going forward before wrapping up our guide on how to send an unpaid invoice to collections.
You can significantly reduce the chances of invoices going unpaid and avoid the stress of collections by optimizing your invoicing process. And here at InvoiceSherpa, we can help you do exactly that without any manual work or costly outsourcing!
InvoiceSherpa automates the process of sending invoice reminders to your clients. This ensures that your clients receive timely reminders before the due date, reducing the likelihood of late payments.
Our software provides a user-friendly platform for your clients to view and pay their invoices, making the payment process seamless and straightforward. You can customize invoice reminders to your liking and ensure you get paid in a timely manner.
And, you can keep track of all your invoices in real-time, allowing you to quickly identify which invoices are outstanding and take immediate action to address them.
Better yet, you can set up automatic payments if applicable for recurring services. This prevents the headaches of constantly chasing down invoices altogether.
Getting set up is quick and easy and you’ll notice a lift in your business right away, both in the form of improved cash flow and greater productivity.
Businesses who leverage our software see a 25% reduction in past due deliverable, a 20% drop in days sales outstanding, and a 15% improvement to bad debt reserves. It’s like hiring a full-time accounts receivable employee at a fraction of the price - just $49/month!
So, get started today and see what InvoiceSherpa can do for you. Below, we’ll offer a few more tips on preventing unpaid invoices from getting to the point where you need to send them to collections.
While some unpaid invoices are unavoidable and simply part of the game, these tactics will lower the likelihood that you have to deal with them:
You can streamline your invoicing process, reduce the occurrence of late payments, and maintain a steady cash flow for your business by taking these steps and utilizing the power of InvoiceSherpa.
Remember, proactive financial management is key to avoiding the headache of collections and ensuring the long-term success of your business. So, get started today as we wrap up our guide on sending an invoice to collections!
Being left with no choice but to send an unpaid invoice to collections is frustrating - and in some cases, daunting. We hope this conversation on how to send an invoice to collection helps you feel more confident and clear in your next steps.
You can lear more about how to find accounts receivable, the importance of cash flow management, account receivable management services, how to forecast accounts receivable, and the accounts receivable automation benefits in our blog.
Don’t let unpaid invoices disrupt your business - invest in InvoiceSherpa today and take the first step towards financial stability and peace of mind!
Posted on November 1, 2023
