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 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?

30 Responses to "The 5 Best Ways to Handle a Late-Paying Client"
    • 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.

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

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

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

      Good article.

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

        Thank you!

    • 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?

    • 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!

    • 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)

    • 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.

    • 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.

    • 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!

    • 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.

    • 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).

    • 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!

    • 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.

    • 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

    • 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.

    • 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!

    • 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!

    • 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.

    • 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.

    • 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.

    • 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.

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