Late payments from customers are an ongoing challenge for businesses of all sizes. Delays in receivables can disrupt cashflow forecasts and hinder a company’s ability to make informed, strategic decisions based on reliable financial data.
Reducing late payments should be a high priority for business leaders and finance teams alike. Yet, too often businesses use manual approaches that slow down invoicing and payment processes.
Let’s explore some common reasons why customers delay payments and discuss what companies can do to minimize the risk of facing this issue.
Understanding late payments
There are plenty of reasons a customer may not pay on time, from cashflow problems to delays in the mail. In most cases, customers are not delaying payment with any malicious intent, but instead are coping with the daily difficulties of running a business. Here are some of the reasons customers may make late payments:
- Administrative mistakes: Customers may be inadvertently introducing payment delays with workflow errors like routing invoices to the wrong staff members.
- Cashflow problems: Customers may not have enough money on-hand when they need it, whether due to mismanaged finances or late payments from others.
- Communication failures: Customers may not understand what to pay and when to pay if invoices and payment reminders aren’t prompt and clear.
- Postal problems: Invoices and checks traveling through the mail can end up delayed due to slow or failed mail services.
- Unacceptable payment options: Customers may slow-walk or delay payment if your company doesn’t provide the payment option they prefer.
- Evasion: Some customers will indeed maliciously ignore your attempts to collect, but this is a less common reason for late payments.
Knowing the many reasons customers may pay late can help you speed up your collections by proactively fixing any identifiable problems with your process. Certain problems you can’t fix, such as customers’ poor administrative habits and cashflow problems, but you can address others, such communication failures and limited payment options.
Keys to reducing late payments
There are a range of changes you can make to your accounts receivable process to avoid late payments from customers.
Promptly send clear invoices
Sending clear invoices promptly must be priority number one in improving your collections process and reducing the number of late payments you receive. Invoices should list the amount owed, the date it is due, and the payment methods you’ll accept. Using an online invoicing service is the best way to make this process fast and accurate.
Offer a range of payment options
Digital invoicing services usually give you the option to offer customers flexibility in how they pay, such as by credit card, Apple Pay, Google Pay, wire, or ACH transfer or debit, which can greatly cut down on late payments. You can include a link to your payment interface directly on the invoice so customers can access it with a single click.
Reduce dependence on the postal service
Using an online invoicing system and receiving payments digitally reduces your dependence on the postal mail system, which keeps the payment process moving more quickly. Not only can you deliver your invoices immediately by sending them electronically, allowing customers the option to pay digitally makes it less likely that they will mail paper checks that may get to you slowly.
Schedule payment reminders
Regardless of whether you use a digital invoicing service or not, you’ll want to send payment reminders on a set schedule after your invoice goes out. It is common to send reminders every 15 to 30 days until the due date. Digital invoicing services typically let you schedule and automate these communications.
Be proactive about dispute resolution
Unresolved disputes can cause customers to pay slowly, as they may put our invoice in the “pending” pile as they try to get to the bottom of the problem. You can speed things up by dedicating staff time and/or putting technical tools in place that help enable fast, proactive communication and dispute management.
How to collect late payments from customers
After a payment is officially late, your reminder communications should give way to late payment letters to your customers, also called dunning letters. Traditionally sent by mail, dunning letters can now be delivered via email, as a PDF attachment, or through a cloud-based portal.
The dunning process typically includes three steps:
- An initial request for payment after the due date has passed
- A series of increasingly formal letters demanding payment and listing consequences of nonpayment
- A final notice, typically sent 120 days or more after the due date and announcing that consequences of nonpayment are forthcoming
Issuing late payment letters not only helps remind customers to pay promptly, but it also signals to them that you take your accounts receivable seriously and maintain an organized process. This can encourage timely payments in the future.
Going digital to speed up your collections process
If you’re going to take one action right away to reduce late payments, consider digitizing any manual steps in your accounts receivable process. This can mean anything from sending invoices via email instead of mail to transitioning to an accounts receivable automation system that facilitates all parts of the invoice-to-cash process. An online payment process is more efficient and effective, allowing you to automate key processes, give customers the payment options they want, facilitate proactive outreach strategies, and reduce dependence on physical mail.
Going digital has the core benefit of massively speeding up almost every part of the invoicing and payment process, making late payments less likely.
Late payment letter templates
You can write a late payment letter in any number of ways, but looking at examples can be helpful in understanding the right tone to take. Regardless of which phrasing you use, it’s essential that you include the amount due, the due date, and how to pay. Always include your contact information and invite the customer to contact you with any questions or concerns.
Below are templates for an initial late payment letter, a 30-day overdue letter, and a final notice. You can adapt these letters with your own details and tone of voice.
Initial late payment letter
Here’s an example of an initial late payment letter, which you might send as soon as payment overdue:
Hi [Contact First Name],
We are writing to inform you that your account is now overdue. Your payment of [Amount Due] was due on [Due Date].
Please send your payment right away by clicking the payment button below.
Reach out to us at [Phone] or [Email] with any questions or to arrange a different way to pay.
Sincerely,
[Name]
30-day overdue letter
Here is an example of a lay payment letter that you might send when the payment is 30 days overdue:
Dear [Contact First Name],
We are still awaiting payment in response to the invoice we issued on [Date of Invoice] for the amount of [Amount Due]. Your payment is now 30 days overdue.
As laid out in our customer agreement, we will shut off service when your payment is 45 days overdue. Additionally, at 60 days overdue, you will accrue a 2% finance charge on the original invoice amount.
Your original invoice is attached to this email. Please pay right away to avoid service interruption and extra charges.
Contact us at [Phone] or [Email] with any questions or concerns.
Thank you,
[Name]
Final notice
Here is an example of a final notice, which you might send at 120 days past due:
Dear [Contact First Name],
This is your final notice about your payment for the invoice dated [Date of Invoice]. Your payment is now 120 days overdue.
We have ended your service and for the last 60 days have been assessing a 2% finance charge on your original amount due. The amount you now owe is [Amount Due].
Please pay that amount immediately by clicking the button below.
If your payment has not arrived by [Date], we will engage a third-party collections agency to pursue payment, which may damage your credit rating.
Contact us at [Phone] or [Email] right away to discuss this issue.
Thank you,
[Name]
Reducing the number of late payments your company receives is vital to boost your cashflow and potential for growth. You have a range of options for prompting customers to pay on time, including digital invoicing, offering multiple payment options, and communicating proactively. Overall, a streamlined, digital-first account receivable process is key to reducing payment delays and helping your business thrive.
To learn how to manage duplicate payments, read our post here.
Katie Gustafson