What should you do when a customer doesn’t pay an invoice?
For most small businesses, getting paid is just as important as making the sale.
You can have plenty of work coming in, happy customers and a healthy-looking sales ledger, but if your customers aren’t paying their invoices on time, your bank account can quickly tell a very different story.
So, what should you do when a customer doesn’t pay?
The temptation can be to go straight to court, but there are several steps you should take first. In many cases, a sensible conversation and a clear payment process can resolve the problem without ever needing to consider a small claims court.
Step 1: Check the invoice
Before chasing your customer, check the basics.
Make sure:
- The invoice was actually sent to the correct person or email address.
- The invoice contains the correct details.
- The payment terms were clearly stated.
- The payment due date has actually passed.
- Your bank account hasn’t received the payment under a different reference.
- There isn’t another invoice or credit note that explains the apparent discrepancy.
It sounds obvious, but it is surprisingly easy to spend time chasing an invoice that was never received, was sent to the wrong person or has already been paid.
Step 2: Send a friendly reminder
If the invoice is only recently overdue, don’t necessarily start with a threatening letter.
A simple email or phone call can often do the trick.
Something as straightforward as:
“Hi [Name], just a quick one to check whether you’ve had a chance to arrange payment of invoice [number], which was due on [date]. Please let me know if there are any issues or if you need anything from me.”
There could be a perfectly innocent reason for the delay.
Perhaps the customer has missed the invoice, their accounts department hasn’t processed it, or they are waiting for some information from you.
And if there is a genuine problem, finding out about it early gives you an opportunity to resolve it.
Step 3: Find out whether the invoice is actually disputed
This is an important distinction.
An overdue invoice isn’t necessarily the same thing as a disputed invoice.
If your customer says they aren’t paying because they believe the work wasn’t completed properly, the amount is incorrect, the goods were faulty or they never agreed to the work, you need to understand the dispute before simply escalating your debt collection.
Don’t ignore a genuine complaint just because the invoice is technically overdue.
Look at your contract, quotation, correspondence and evidence of the work you carried out.
If the customer has a legitimate issue, resolving that issue may be considerably quicker and cheaper than taking the matter to court.
Step 4: Send a formal payment demand
If the invoice remains unpaid and there is no genuine dispute, it is time to become more formal.
Write to the customer explaining:
- The invoice number and amount outstanding.
- The date the invoice was issued.
- The original payment due date.
- That the invoice remains unpaid.
- When you now require payment.
- How the customer can make payment.
You should keep copies of all correspondence.
This is also a good point to consider whether you are entitled to charge interest or compensation for late payment. Depending on the circumstances, businesses may have rights under the Late Payment of Commercial Debts (Interest) Act 1998, particularly for qualifying business-to-business debts.
Don’t simply add charges because you can find them on the internet, though. Check that they actually apply to your particular situation.
Step 5: Keep your evidence
If you think the matter could eventually end up in court, start thinking like a court might.
Keep copies of:
- The quotation or contract.
- Your terms and conditions.
- The customer’s acceptance of the work.
- Invoices.
- Emails and other correspondence.
- Evidence that the work or goods were supplied.
- Any complaints or disputes raised by the customer.
- Records of your attempts to obtain payment.
A court will want to understand what happened and why you believe the money is owed.
Good record keeping can therefore be incredibly valuable.
Step 6: Consider a Letter Before Claim
If you’ve tried to resolve the matter and the customer still hasn’t paid, you may need to send a Letter Before Claim (sometimes called a Letter Before Action).
This is a formal warning that you intend to take legal action if the debt isn’t resolved.
It should clearly explain what you are claiming, why you believe the money is owed, how the amount has been calculated and what you want the customer to do.
For businesses dealing with individuals or sole traders, the relevant pre-action requirements can differ from those applying to other commercial disputes, so it’s important to follow the appropriate process.
The purpose of the letter isn’t simply to sound threatening.
Ideally, it gives both parties one final opportunity to resolve the matter without court proceedings.
Step 7: Consider mediation
Before issuing a court claim, ask yourself whether there is still an opportunity to reach an agreement.
Mediation can sometimes be a useful way of resolving a dispute without the cost and stress of a hearing.
You may even decide that accepting a reasonable payment plan or negotiated settlement is preferable to spending significant time pursuing the full amount.
That doesn’t mean you should simply write off money that you’re owed.
It means considering the commercial reality of pursuing the debt.
Step 7: Consider mediation
Before issuing a court claim, ask yourself whether there is still an opportunity to reach an agreement.
Mediation can sometimes be a useful way of resolving a dispute without the cost and stress of a hearing.
You may even decide that accepting a reasonable payment plan or negotiated settlement is preferable to spending significant time pursuing the full amount.
That doesn’t mean you should simply write off money that you’re owed.
It means considering the commercial reality of pursuing the debt.
Step 8: Small claims court may be the next step
If you’ve exhausted reasonable attempts to resolve the matter and you genuinely believe the money is owed, you may decide to make a County Court claim.
For eligible claims, the small claims track provides a relatively straightforward way of pursuing certain lower-value civil claims.
However, going to court shouldn’t be treated as a guaranteed way of getting your money back.
You need to consider:
- The strength of your evidence.
- Whether the customer has a genuine defence.
- The court fee and other costs involved.
- The time involved in pursuing the claim.
- Whether the customer has the ability to pay.
- What happens if you win but the customer still doesn’t pay.
That last point is particularly important.
Winning a judgment does not necessarily mean the money will immediately appear in your bank account.
If the customer doesn’t pay a County Court Judgment, you may need to consider enforcement options, which can involve additional costs.
Don’t let an unpaid invoice become a cashflow crisis
The best debt collection strategy is often to prevent the problem from occurring in the first place.
Make sure your payment terms are clear before you start work. Invoice promptly. Make it easy for customers to pay and keep an eye on your aged debtors.
And don’t be afraid to have the payment conversation.
Chasing an overdue invoice isn’t rude or unreasonable. You’ve provided goods or services and your business is entitled to be paid for them.
For a small business, cash in the bank is far more useful than profit sitting on an unpaid sales ledger.
If a customer doesn’t pay, don’t panic and don’t necessarily reach for the court forms immediately.
Check. Chase. Communicate. Formalise. Then, if necessary, consider legal action.
And if you’re unsure about your rights or the appropriate process for a particular debt, get professional legal advice before taking court action.