Payment recovery 101: Tips to recover your overdue receivables

Having a good relationship with your customer is crucial. When it’s time to collect payments, though, things may get challenging, especially if there’s a delay on their side. There are many ways to avoid late payments, but what if you’ve done your part of the work and the payment still hasn’t been made? When you have to pursue an overdue payment, knowing the different steps you can take—whether personal, third-party, or legal—will help you keep your business running and your cash flow intact.

Here’s how you can recover your overdue payments effectively and get your money back in your register. 

Debt recovery plan: how to recover overdue payments

Personal steps you can take

Start with sending a payment reminder a week before the due date. If you can, make these reminders automated to reduce your workload. Doing this makes your communication more consistent, and gives them a heads up to prepare for payment. Here’s a schedule you can follow for sending payment reminders:

• 7-10 days after the due date: Send a friendly reminder with a copy of the invoice.

• 20-25 days after the due date: Send another payment reminder, with a direct but polite message. You can remind the customer of any interest and fees that will be added as a consequence of late payment.

• 35-45 days after the due date: Try to make direct contact with the customer, so you can identify any issues preventing them from making a payment and come up with a solution. If you can find a solution, this can also help you build a personal relationship with them, improving customer satisfaction. If your customer doesn’t have enough money to pay in full, try to convince them that paying you has to be their top priority when they have money available.

• 55-65 days after the due date: If the customer still doesn’t respond, send a reminder and mention that if they’re regularly late on payments, you’ll have to stop providing your goods or services to them. Set a deadline for when your services will be stopped until payments are received, and consider running a skip trace to find your customer if they’re still unreachable.

• 90 days after the due date: Send a final notice, a solicitor’s warning letter, or a statutory demand. Include the details of the payment due, and make a final request.

Despite all reminders and a failed payment, if you still want to keep your customer, insist on advanced payments in the future. This will ensure that you receive your dues securely, preventing any risks of payment delay. 

Note: If you’re in need of cash while waiting for your customer to pay, you can use factoring services, in which you sell your accounts receivable for a certain percentage of their value (usually around 70-90%). However, every time you use a factoring service for your customers, your service fees will keep adding up, so always think things through before selling multiple invoices.

Third-party intervention 

1. Debt collection agencies

If you haven’t received payment for more than 90 days, you can use a debt collection agency to follow up with your customer to collect the dues. Do your research to see if the debt collector is well known within your circles, and check their credit scores, track record, and terms and conditions. Look for an agency that has a no-collection no-fee policy, so you will only have to pay them once your dues are collected. You wouldn’t want to lose more money in the process of collecting your accounts receivable. 

If you’re thinking of doing this, remember that the longer a customer has been delinquent in paying, the less likely they’ll be to pay you. According to Business News Daily, waiting longer than 120 days to collect the debt means a smaller chance of actually recovering your money. So, if the gap continues to extend for a long time (120-150 days or beyond), think about the lowest invoice value you’d want to approach a debt collection agency with, as well as the highest invoice value you’d be willing to write off as a bad debt.

For instance, you might decide on a range of $300-$500. This means that you’ve decided it’s not worth going to a debt collection agency for anything below $300, and that anything below $500 is money that you might be willing to write off, if collecting it involves further complications and delay. 

2. Debt mediation services

Within the 90-120 day range, you can choose instead to seek a professional mediator to help you and your customer reach a settlement for effective debt recovery. This is different from a debt collection agency, as the agency takes on the responsibility of pursuing the customer and recovering your dues, while a mediator functions as a middleman to help sort out any conflicts between the two parties. The mediator will try to bring the due amount down to a lower amount that you and your customer can agree on, and will arrange for the amount to be collected from them on a periodic basis. However, your client must agree to being called in for mediation for this to work.

Legal solutions

If the payment is more than 120 days overdue, you can choose to take a legal route to recover overdue payments from your customer. Before you do so, send them a final notice with a summary of your communication, the amount due, copies of any documents related to the overdue payment, and a deadline for a response (usually 28 days). 

While considering a court dispute to recover your AR, check the legal costs of doing so. If the costs will be higher than your receivables, it’s not worth it. But if you need to recover a large amount, and the customer refuses to pay you or a collection agency (if you’ve tried one before taking the legal route), then filing a lawsuit in small claims court could help your chances.

What’s next?

After exploring all of these options, if you haven’t been able to recover your payment, your last resort would be to simply write off the unpaid amount as a bad debt. Writing it off is not just a formal way to wrap up your books; it ensures that your company’s asset figures won’t be inaccurately inflated by money that won’t be coming in.

Recovering your accounts receivable can be a lengthy process, but you can make it simpler by taking precautions and communicating effectively. If you end up with overdue receivables, start with the recovery options that save your business the most money and see how far you can get. Sometimes, writing off bad debt can help you prevent further loss, but if there’s a big sum you need to recover and you’re prepared to pursue it, there are plenty of options, ranging from basic communication to debt recovery agencies and legal action.

Zoho Books is an online accounting solution that can help during this process, with automated payment reminders, invoice aging reports, and more. With these tools at your disposal, take each step as it comes and get your money back where it belongs.