The 5 Best Ways to Handle a Late-Paying Client

Alexander Huls

A small business’s cash flow is, not surprisingly, dependent on cash. That’s why late-paying clients can be an incredibly frustrating challenge for a small business owner. It not only ties up money you need to pay your own bills — trying to get clients to pay can become a real time drain. In fact, a 2017 study found that small business owners spend an average of 1.3 days a month chasing down money that’s owed to them.

Here are five of the best ways to deal with late-paying clients.

1. Remember That You Deserve That Money

Nobody likes to feel like a pest. Nor do most people enjoy having to ask someone to pay what they owe. That’s why many small business owners can struggle with late-paying clients. After all, when looking to pursue your passion and dreams, hounding people for money probably wasn’t on the top of the list of things you imagined doing. But here’s the thing: Asking people to pay up is part of your business. And one of the most important steps to getting late payers to give you money is adjusting your state of mind.

Always remember this: You should never feel bad asking for money you’re owed. You worked hard for it. You deserve it. They’re the ones who should be feeling bad. Not you. If you have provided a service to a client, it’s no longer their money. It’s your money. Let this thinking become second nature. If you need some help doing that, adopt “I deserve this money” as a motto you silently whisper to yourself whenever you’re about to send a follow-up email. Or, write the words on a sticky note and post it on your computer so you can see it. Soak them in until you never feel bad about following up on money again.

2. Establish Clear Payment Deadlines

One way of contending with late-paying clients is to establish immovable payment deadlines in a contract that clients will sign before you start work. While 60- or 90-day deadlines are common, don’t adopt them just because others do. Determine what deadline you want based on what your cash flow needs are.

Does a 60-day deadline risk throwing off your own monthly payments — whether it’s for rent, cloud storage, or insurance? Then request a 30-day deadline instead. Or even 14 days if that works best for you. Always pick a timeline that suits your business needs. Then make it ironclad in a contract. That is especially important in case — knock on wood — collection services or legal processes become necessary.

Now, it’s worth mentioning what you should do if a prospective client balks at your timeline. First off, this may actually be a useful red flag. But, if you feel the client is legitimate, or worth being flexible for, feel free to negotiate. Just make sure whatever compromise you reach still suits you, and is set in stone with an updated contract.

3. Adopt Early Payment Incentives and Late Payment Penalties

Since we’re talking about contracts, there are several things you can do to discourage — and protect yourself from — late payments. First, consider offering a financial incentive for quick and early payment. If a contract’s payment deadline is 30 days, offer a small discount (up to 5%) for those who pay within 14 days. If you’re hesitant about forfeiting that revenue, think of it like this: That discount is well worth the cash flow peace of mind it provides — plus, you’ve saved the hours you would have spent following up.

The second clause you could put in a contract is a late payment penalty. You’ll have to decide on the percentage and timing, but be careful about going overboard. Penalties can be a double-edged sword. Yes, it’s a means to ensure you’re either paid on time or paid for the inconvenience of having to wait. But it can also instill resentment. Nobody likes being penalized. It’s worth remembering, too, that, ideally, instituting a late payment penalty is meant to be more of a deterrent for anyone to pay late, rather than being an actual penalty you then have to collect.

4. Automate the Invoicing and Follow-Up Process

If you have late-paying clients, you’ll become very familiar with following up. This can be a time consuming chore, and one you don’t really want added to the million balls you’re already juggling as a small business owner. That’s why you should consider using an accounting solution like FreshBooks, QuickBooks, or Xero that can automate invoicing and follow-ups.

Most programs not only send invoices, but they also can be prescheduled to send out reminder emails on late payments. They’ll do what they’re designed to do, which will free you up considerably to focus on more immediate tasks your small business requires. Many accounting programs also allow clients not just to see invoices, but also submit payments.

Consider pairing this tip with setting up additional payment options like PayPal or Bill.com to make it that much easier for customers to act on the reminders they’re getting.

5. Never Get Angry

Considering how dependent your small business is on cash flow, late-paying clients can make it very easy to not just tear your hair out, but also to get angry at them. After all, they’re negatively impacting your business, right? And yet you need to do your best to never unleash your inner Hulk. That anger will only hurt you.

As much as the above tips will help minimize late payments, the truth is that they are a common part of doing business. A Xero study found that more than one-third of customers pay at least two weeks late. So if you get angry every time it happens, you may very quickly burn through clients you don’t want to lose. It’s worth remembering, too, that not all late clients are bad clients. That may sound counter-intuitive, but it’s true. After all, back in the days of video rental, who among us didn’t sometimes bring back a video late — despite the best intentions?

That’s why you need to maintain a cordial relationship with even late-paying clients. Don’t send angry messages. Send friendly and personalized ones. You especially want to do that with clients who aren’t chronically late. You never know what problems they’re dealing with on their end. Maybe their accounting department is undergoing heavy turnover. Perhaps something has gone wrong with their bank. Sometimes two months of late payments can be an anomaly.

If you keep your cool, the patience and goodwill you generate can benefit you greatly once the problems go away and a client becomes reliable again with their payments. They’ll appreciate your understanding, and your business relationship will be deepened.

How about you — are late invoice payments hurting your business? What tips can you share with other small business owners looking to deal with late-paying clients?

56 Responses to "The 5 Best Ways to Handle a Late-Paying Client"
    • Mark Goldberg | May 21, 2021 at 10:53 am

      I learned in my photography and video business to be paid on a progress basis, with a retainer (or reservation*) fee with contracting or start of work, major progress (or second installment*) payment along the way, and a final payment upon completion. Starred items * refer to social event assignments. I found more problems with business clients than those with weddings and social events. It is very easy to be pushed to angry exchanges, but I learned to stay cool and make carefully written emails or letters but have the option of a small-claims lawsuit available. I never had to employ that. Having clear written agreements or working understandings go a long way.

      • Small Biz Ahead | May 24, 2021 at 11:04 am

        Thank you for sharing your advice and insights, Mark!

    • DANIEL KENNEDY | May 21, 2021 at 7:44 am

      There is a wealth of great advice below. I can only add that for our company we count on the small percentage of late payers. They’ll owe us money and we won’t hear from them for a few weeks or a few months. But our Acct. Dept person keeps track of all calls made, date, time of day, persons first and last name, etc. and sets up a follow up call/email. That’s critical, because you’re holding people personally accountable. Always be polite and understanding. Anything may have taken place to interrupt cash flow in a company including a death in the family, Covid, an illness, somebody quit, they aren’t getting paid, the list goes on.

      Again, credit to the woman in charge of accounting, she’s been told more than once by late payers in the chain at their end “Your the only person that isn’t yelling at me” or “Being nasty, when the money comes in, you’re on the top of the list to get paid, Thank you.” Boom, a check of some amount or all, shows up soon after. You get more flies with honey. The person you speak with, may not be making the decisions on who gets paid and when? They can be your ally. As for late payers being a blessing, we see it as money in the bank. Once they’re late with other sources, they pay us so they can buy from us again. It’s a rotation they play. And 27 years in business, it’s never changed. If they are local enough (a few minutes or a few hours drive or a flight away) depending on what they owe you, pay them a friendly visit. You’d be surprised how they change their tune. You can learn a lot with a visit from your eyes and sometimes, walk away with a partial payment or settle on a payment plan and put them on hold until they’re under X amount of dollars, that works too. “How about 5-10-20 percent of what you owe us each month until it’s paid?” It has worked for us.

      You’ll have a customer for life once that client/customer turns their situation around because they know, you’ll work with them or you may never hear from them again because they are embarrassed about what happened and they may be going out of business. There may even be an opportunity there for you? A partial payment is better than nothing from more phone calls and emails, paying a lawyer. It doesn’t always have a happy ending. Gauge what’s best for you and your company. We try to use a tactical approach to their situation, find out why they are late. You may need the clients/customers and their money but at what cost to you? In the future, you can always charge them a bit more for your products or services, once they’re caught up. Sometimes, you just need to pull the plug and walk away, hopefully after you’ve been paid. It’s always a process, it just depends on which process you follow to get your desired result.

      • Small Biz Ahead | May 21, 2021 at 9:14 am

        Thanks for sharing your experience and insight, Daniel! We appreciate you taking the time to comment!

        • JOAN Burkholder | May 21, 2021 at 10:19 am

          Daniel, excellent advice. We use something similar to your procedure. Most of our communications with our customers is via email as many are in a time zone when their working day is our sleeping time. On the positive side many of these customers have been with us for 35 years. We are mentioned from time to time in their articles, always in a positive way. That sends new customers our way.

    • Lawrence Jensen | May 20, 2021 at 1:12 pm

      Late payment penalties must be very carefully crafted to be legal under California law. If the penalty is not calculated to fairly represent the actual loss suffered by the vendor in the event of late payment, it is illegal/unenforceable.

      • Small Biz Ahead | May 21, 2021 at 7:25 am

        Thanks for the insights and comment, Lawrence!

    • Kevin Forsyth | May 20, 2021 at 9:07 am

      Here is a comment that one of the top cable company executives in the mid 90’s made to me in a business meeting: “ We teach people how to pay by the way we treat them when they don’t.” I will never forget that quote.

      • Small Biz Ahead | May 21, 2021 at 7:32 am

        Thank you for sharing that quote, Kevin! That’s very interesting to consider!

    • Jason M Douglas | May 20, 2021 at 8:51 am

      One of the ways we have helped to tackle this is by enforcing a strict 50% down payment for all private or new clients. While our long-term clients may occasionally pay a bit late obtaining payment on many of our newer clients right of way offsets the problem of late-paying or slow-paying long term clients.

      • Small Biz Ahead | May 21, 2021 at 7:33 am

        Great insights, Jason! Thank you for taking the time to comment!

    • JOAN Burkholder | May 20, 2021 at 8:43 am

      We would not hesitate to tell customers that we would stop by; But many are not local and some are not domestic. They are international. So, it’s not easy to stop by. I don’t think they will do this anymore; But, many, many years ago I got so exasperated with a foreign government payment that was running 6 months late, I called my contact at the Dept. of Commerce to complain. They actually sent a courier over to collect a check. He brought the check back within the week!

      • Small Biz Ahead | May 21, 2021 at 7:30 am

        Thank you for sharing, Joan! We appreciate the comment.

    • JOAN Burkholder | May 20, 2021 at 7:34 am

      These are helpful for some small businesses. Not ours. What we’ve done, includes sending a note to the “End-User” of the equipment. Then sending another note to the office administrator. It is not unusual for the customer “End-User” to be so anxious to use our equipment they forget the Invoices need to be processed for payment. Also simultaneously, we send the Invoice to the payable department. They are also sent late notices. Sometimes they respond to early payment discounts. When adding a late fee penalty those are ignored. The bill is eventually paid; but, not the late fee charge. We have a few who are consistently late. We keep a record of who they are. The next time they order (they usually do) they are quoted a larger price for the item they wish to buy.

      • Small Biz Ahead | May 20, 2021 at 8:47 am

        Thank you for sharing your experiences, Joan!

    • Dan Desjardins | May 20, 2021 at 7:22 am

      Regarding adoption of late payment penalties: I find that they ignore them. They pay the original invoice regardless of how late the payment is.
      I tried offering early payment discounts and in more than one case they paid late AND TOOK THE DISCOUNT! Here’s another thing to worry about – Some companies have simply adopted a policy of only paying net 90 regardless of the terms. 3M sent a letter to their suppliers saying it was necessary to remain competitive. It seems to me that anything past net 60 should automatically convert to a short-term business loan with appropriate terms (8% minimum). Unfortunately it will take legislation to give this any teeth. If that were to happen companies will decry “regulation overreach” while they continue to use small vendors for millions of dollars of interest-free short term loans.

      • Small Biz Ahead | May 20, 2021 at 8:43 am

        Thank you for the comment, Dan! Those are interesting points!

    • John Tykowski | May 20, 2021 at 5:18 am

      Something net 60 is worth far more than nothing net 30. I adjust my service rates based on actual payment dates. I have net 30, net 45, & net 60 rates. Many purchasing agents don’t have flexibility.

    • Joel Howard | May 20, 2021 at 12:48 am

      I have failed to maintain the nice approach, later in life. Why did it seem easier to be nice 10 years ago? It seems the nice approach has made the same customers think it’s ok to be late for 20 years? I think it’s ok to be firm and a little “unhappy” when you have employees to pay, rent, supplies and more.

      • Small Biz Ahead | May 20, 2021 at 8:36 am

        Thank you for sharing, Joel!

    • Joe D'Occhio | May 20, 2021 at 12:21 am

      This works every time…..I call my customers who are way past due and leave a voice message followed by an email that I will be in the area next week and WILL BE STOPPING BY your office to pick up a check for the services we provided. In the message I include the date of service and invoice number. Usually I get a response that a check is being processed and I should receive it shortly. No one wants an upset vendor showing up in their office asking for payment. I’ve only had to actually do this once, and they paid onsite.

      • Small Biz Ahead | May 20, 2021 at 8:35 am

        Thank you for sharing, Joe! That’s useful knowledge!

    • Barbara | May 19, 2021 at 10:25 pm

      Great suggestions. Of note, for example, I am an attorney with many clients paying an advanced fee up front (a.k.a retainer), with other clients paying monthly. We tried offering the discount for payments within a few days in full and noted it on our invoices that everyone receives. It worked for some of the monthly people. However, some of the clients with advance fees on accounts wanted the same discount because their bills were paid in full immediately. ARGH. Lesson learned: 1. Don’t put it on everyone’s invoice [as with other messages that go on every invoice] 2. Don’t put it in the Fee Agreement either, for the same reason. Technically, the clients with the advanced fee on their account were correct, they should get the discount as well.

      • Small Biz Ahead | May 20, 2021 at 8:34 am

        Great insights, Barbara! Thank you for sharing.

    • Susan | April 14, 2021 at 5:09 pm

      The lab I work in recently sent an invoice for testing our lab. The client is upset because they asked us to change something in our results. Our Ethics policy forbids us from doing this. So, this said client is upset and not paying their invoice for the testing that was done. Do you have any suggestions for how to handle this via email?

      • Gene Marks | April 21, 2021 at 8:25 am

        This is not an email issue – it’s a phone or face to face conversation. You have to together work out this invoice – if there was a miscommunication then your best bet is to split the cost and then you know going forward how to deal with this client.

    • Julie | January 8, 2021 at 1:05 pm

      I only have 3 consistent clients and the one that brings in the most cashflow is chronically late. Whenever I send reminders they ignore me and can pay up to weeks later. I also set up a contract in which they are allotted 3 times my normal payment period (90 days) as they requested that and I wanted to keep them as a client. Advice?

      • Gene Marks | February 22, 2021 at 8:46 am

        I have this situation myself. We moved to a “block of time” retainer relationship where we ask our clients to purchase a block (we use a 4 hour minimum, but you can use anything) in advance and then you charge your time in 15 minute increments against the block. No services can be performed without a block. Accept credit cards too.

      • Lawrence Jensen | May 20, 2021 at 1:16 pm

        My experience with this type of client is that you need to control the amount of credit you are granting them (which is actually what you are doing when you let them pay late), as this type of behavior is a sign of financial distress. You may need to have a “Plan B” in case this client files bankruptcy or otherwise becomes insolvent.

    • Deyanira Salazar | August 7, 2020 at 1:52 am

      I send a letter to remind my customers to pay their tuition for my tutorials. It is usually the one thing that reminds them, and most will pay very soon after receiving my letter.

    • Aimee Wilson | August 6, 2020 at 1:21 pm

      I find it curious that this article is originally from 2018, updated in 2019 but nothing making reference to the times we are now living in!
      Would like to hear about from those who are handling outstanding A/R situations while we’re all dealing with Covid-19 fallout.
      I was chasing a 90 day outstanding invoice when the epidemic hit. I left the account alone for 2mths & then sent a polite email understanding that these were difficult times, etc but confirming that we needed to collect on a situation that was dated before our worlds were shuttered. Contact upon contact were then laid off until I think I got as far up the chain as I could with a “we’ll look into it” response. That was weeks ago.
      We’re a small business, they’re not.
      We have no outstanding A/P & I’m sure they have enough that they might just claim bankruptcy & come out of the ashes as a new entity later.
      We’re both in the entertainment industry with no clear date of any normal business for the foreseeable future. I feel like a hamster.
      Any advice?

      • Hannah Stacy | November 3, 2020 at 12:21 pm

        Response from Gene Marks: This is a problem that many small businesses face and it’s not reported on enough. My recommendation is to go on LinkedIn and find the names of every person that would have some involvement in your transaction. Find out their email addresses and email them. In a professional manner, you should make yourself known to all parties involved. The next time you do work with this company – and there’s no reason not to if the work is profitable – then make sure you get some cash up front.

    • Angela | March 1, 2020 at 9:48 am

      Thank you so much for this article. I’ve been struggling with a client that is always around $3000-$5000 in the hole. As a small business, this greatly affects the cash flow of my business. I hate asking for the money but If I don’t, I’m sure I won’t get anything for a long time. It’s like if I don’t ask, I’m just left on the sidelines. Number 1 and 2 really hit home. Thank you!

      • Chloe Silverman | March 2, 2020 at 8:55 am

        We are glad you found this article helpful. Thank you for commenting!

    • Stephen McKay | January 19, 2020 at 7:40 am

      Hi Alexander, excellent article and such an important topic for so many businesses.

      • Chloe Silverman | January 21, 2020 at 8:44 am

        Thank you for reading, Stephen!

    • Carol | August 26, 2019 at 4:58 pm

      Is it a good idea to use a financial service, such as Baton Financial, to offset late payments so that there are no cash flow issues? From my interpretation, invoices will go to Baton Financial and they send our clients the invoices. Baton will pay us within 3 days and wait for our client’s payments. Our clients are construction companies who are notorious for waiting 30 to 60 days to pay subcontractors.

    • Steve Lindemann | April 11, 2019 at 11:45 pm

      This was a great article. We have a picture framing business and most recently have required 1/2 down or payment in full at the time of the order. Our cash flow has improved greatly!

      The point I’d like to make is people don’t check their voice mail that often and don’t respond to emails
      asking them to pay their bill. I have found texting is the new best way to interact with your customers.
      People respond to texting—for both outstanding invoice notifications and that their project is finished
      and ready to be picked up. Leaving a voice mail–is like sending a fax–a outdated way of communicating!

      • Elizabeth Larkin | April 12, 2019 at 10:09 am

        Great tip, Steve! Thanks, Elizabeth

    • Mark Goldberg | April 11, 2019 at 7:56 pm

      I know some who have employed collection agencies or attorneys and had collection costs and interest tacked on to the bill.

    • Gene marks | April 11, 2019 at 3:35 pm

      Hi Rosalba,

      you asked: “I wonder if it is worth to sell the account to a collection agency after all the above fails. Any suggestions or advises on this field?”

      I’ve worked with collection agencies in the past (and can recommend a few). You don’t “sell” your receivable to them per se. They just go on the hunt. It’s always a last chance, hail mary kind of thing. If you’re sending an invoice to a collection agency then you might as well just write it off. They’ll write a few nasty letters which may scare the customer into paying and that would be money from heaven! The agency will take about 30-40% of what they collect which to me is a good deal because I’ll take whatever money they can shake up at that point! If the agency doesn’t make progress you’ll have to pay them additional if you want to take things to court. I’ve never gone that far.

      Hope this helps!

    • Ike K | April 11, 2019 at 12:43 pm

      I am self employed but I send my invoices in the third person, company voice. I also send invoices promptly every month with a net 30. I find this separates personable me from my company. I also think it make things more professional looking and my clients respect that. FYI – Quickbooks has several collection templates ranging from polite reminders to pay now! (which I’ve never had to use).

    • Rosalba Monreal | April 11, 2019 at 10:54 am

      Great article! I wonder if it is worth to sell the account to a collection agency after all the above fails. Any suggestions or advises on this field?
      I woul like to see the demand letter of Dennis Seeney too.

    • Mark Goldberg | April 11, 2019 at 9:31 am

      In my business of event video and photography or video lab service, most jobs involve a contract and series of payments: (1) an initial non-refundable* reservation fee or service retainer when contracting; (2) an intermediate payment of at least half of the contract amount (so that I have 3/4 on account), and a small final payment on delivery of result. *The non-refundable part is because I turn away all other requests for that date and time; if the cancellation is due to a serious problem like death in family or serious accident, I offer a full refund.

      I evolved this over time. At contracting their checkbook is on 101 but after the job, e.g. wedding, it is on 219 and funds may be tight. They are not going to risk losing payments made to date.

      My contract also provides that they can be held responsible for collection costs and attorney’s fees.

      Most problems in my experience come from commercial and governmental accounts – the latter being the worst. I added a provision that they do not have copyright control unless all payments are up to date.

      There are repeat clients for various services where I don’t bother with a contract or initial/intermediate payments unless I have a large outlay for services and materials. I trust them, and they appreciate that.

      • Hannah Sullivan | April 11, 2019 at 1:53 pm

        Thank you for sharing your experience, Mark!

    • Ted Yasi | April 11, 2019 at 12:26 am

      Many of my clients are “cost sensitive” for me that is an easy way to open the subject of a COD discount. It turns the tables from me trying to collect my payment to, I am providing them with a savings.
      Just about 50 percent of my clients will jump at the chance to save 10 percent by paying early.

    • Rose Natter | April 10, 2019 at 6:12 pm

      Hanging a reminder sign that payment is due was something I saw at a preschool. When I asked the owner she said it helps.

      We are a service business and clients visit weekly. We were dealing with many late payers. We have decreased the late payers to less than 10% by posting a reminder on the door the last week of the month that the monthly tuition is due for the upcoming month. So many clients have thanked me for posting reminder and said it helps. Not to mention it has saved me the time of chasing them down.
      For those who still need a reminder on the first week of the month the first sign is replaced with a stronger sign stating tutions is due today to secure your day and time. The posting of the second sign has reduce late payments even further. Thank you for these great articles and all your comments.

    • Colleen Carroll | April 10, 2019 at 10:16 am

      Great article!

      I send an email asking for payment status. If I haven’t heard back within 5 business days, I call the person responsible or the Accounts Payable department.

      In some cases we have an Admin listed as the main contact. If I receive no response on these accounts, I follow-up with another email and copy the person they report to stating this is a follow-up message and include the initial email. I usually receive payments that same week in these situations.

      I too would be interested in seeing a copy of Dennis Sweeney’s “demand letter”. (Dennis Sweeney | May 15, 2018 at 11:05 pm)

    • Hilary V | April 8, 2019 at 2:44 pm

      @CablingPro: Before paying a lawyer, I’d do the following:

      1) Consider following up with a different contact. For instance, if you’ve been dealing with A/P, ask for a supervisor or even the owner. If your current contact is already high on the food chain, reach out directly to the accounting department – they may be the ones who determine a check run in the first place.
      2) Mail a copy of the invoice or statement along with a stern – but not nasty – letter via certified mail or similar service that requires a signature. Then you have a paper trail if you ultimately pursue formal collection. Search online for good collection letter templates. Make it as easy as possible for them to pay: include a SASE for their check, or a credit card authorization form with the past due amount clearly stated. Good luck!

    • Cabling Pro | February 9, 2019 at 8:47 am

      What do you do when a client stops returning your calls about overdue invoices and you feel like sending polite emails have reached a point of diminishing return?
      Is getting a letter from your lawyer going to motivate the slow paying customer to respond?

    • William L Pratt | September 6, 2018 at 11:50 am

      Good article.

      • Hannah Sullivan | September 6, 2018 at 12:21 pm

        Thank you!

    • Susan Sharp | July 25, 2018 at 9:14 am

      Dennis Sweeney – would you be willing to share a template of your demand letter? SSharp

      1
    • Dennis Sweeney | May 15, 2018 at 11:05 pm

      Our small company will have trouble collecting on occasion. I recently wrote two demand letters. And attached the invoices. They were nicely written and understanding. Both clients paid me within 10 days of the letter.

      • Elizabeth | May 20, 2021 at 11:09 am

        This is excellent advice and very timely for me. One client is 2 months behind.

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