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Unpaid Invoices: How to Deal With Them and Their Cash Flow Impact

December 16, 2021 6 min. read

Unpaid invoices are a common pest for home service business owners.

But when one or two outstanding payments turn into dozens, that can seriously hurt your cash flow and slow your business’s growth.

In this article, you’ll learn more about the effects unpaid invoices have on your cash flow, and simple ways to get them paid and keep your business growing.

What is an unpaid invoice?

An unpaid invoice or an outstanding invoice is an invoice that’s already been sent to a customer but hasn’t been paid by the due date.

Unpaid invoices can interrupt your cash flow, making it more difficult for you to pay your employees, yourself, vendors, suppliers, and your bills on time.

How unpaid invoices impact your business’s cash flow

Slow payments and unpaid invoices can harm any business and prevent growth. This is especially true for small businesses that rely on big ticket jobs to stay profitable.

Here are a few ways your business can suffer from unpaid invoices:

  1. Personal pay cuts. When unpaid invoices weaken cash flow, many business owners start by taking cuts from their own earnings to make up for losses.
  2. Marketing budget cuts. You might need to cut marketing expenses when money is tight. That can devastate small businesses that rely on fast growth to stay afloat.
  3. Hiring freezes. You won’t be able to fill essential roles if you don’t have the cash flow to sustain new employees.
  4. Suspended equipment purchases. If you need new equipment, losing money from unpaid invoices can delay those important upgrades that your jobs demand.
  5. Employee pay cuts. Your last resort might be to cut payroll hours, which puts your employees and their livelihoods on the line.

How to collect unpaid invoices and bills politely

Before you pursue legal action or hire a collection agency to chase down past due invoices, here’s what you should do to politely collect payments:

  1. Send a friendly reminder message
    Sometimes, a polite nudge through a reminder email or a phone call is all it takes to turn those unpaid bills into paid invoices.
  2. Resend your invoice
    In case your customer lost the invoice or just completely forgot about it, resending the invoice can prompt the customer to remember and pay.

If these polite reminders don’t work, it’s time to try more advanced methods. Read these 5 steps you need to take when a customer won’t pay.

How to avoid outstanding invoices in the first place

It’s important to remember unpaid invoices aren’t 100% avoidable. But, there are a few measures you can take to prevent missed payments.

1. Set clear payment terms on your invoices

Whether it’s within 30 days or upon receipt, make sure your invoices clearly state the payment terms.

Your payment terms should tell customers:

  • How to pay you
  • The payment due date
  • What happens if payment is late

These payment terms need to be clear and noticeable on the invoice so there’s no confusion when it comes time to pay.

2. Put an invoice late fee or penalty in place

A late payment fee might be the motivation your customers need to pay on time. After all, no one likes to pay a fee!

Just remember: if you don’t charge late payment fees right now, you’ll have to communicate this policy change to all of your customers. You can include this notice on their next invoice, and in the email or text message you use to send your invoice.

The last thing you want is to surprise an unknowing customer—especially one with a good track record—with a late fee!

READ MORE: Should businesses charge late fees on invoices?

3. Allow customers to pay invoices in installments

Instead of only letting customers pay for a service up front, you can offer financing to customers to help them pay in installments.

When you get paid right away with help from a financing provider, outstanding payments aren’t a problem. Offering financing can help you win over potential clients, too.

READ MORE: Get paid faster when you use consumer financing with Jobber

4. Automate payment reminder follow-ups

Use a tool that sends out automatic reminders to customers who aren’t paying. When you automate your follow-up process, you can spend less time chasing down payments and more time growing your business.

Pro Tip: You can use field service invoicing software to send automated follow-ups that prompt customers to pay their overdue invoices. Software like Jobber will send out automatic emails and texts asking them to pay, so you don’t have to.

5. Accept online payments to make paying invoices easier

What are your payment options? Are you only sending invoices and accepting payments by mail?

A complicated payment process can put off customers from making payments. Consider switching to credit card payments to make things easier for your customers.

If you have clients with weekly or monthly visits, you should set up recurring payment processing to get paid automatically on a regular basis.

READ MORE: Get set up to collect payments from customers

What causes unpaid invoices?

While unpaid invoices can be frustrating for you as a business owner, you don’t always know the full story behind them.

Here are some possible reasons why a customer might let an invoice go unpaid:

  • They forgot to pay. Your customer may be dealing with personal issues, like a family emergency or an illness. They could also be out of town on business or vacation. Sometimes there are no bad intentions behind a missed payment and customers simply forget. Just like you, your customers have a lot going on in their lives!
  • There’s been a miscommunication. Double check that you have the right email address, phone number, and even customer name on your original invoice. It’s also possible that there was an error in the payment due date.
  • It’s difficult for the customer to actually pay you. Are you unintentionally making it hard for your customers to make a payment? If you don’t have a convenient payment process, it may be time for online payment software that makes it easier and faster for customers to pay you on time.
  • Your customer is purposefully avoiding payment. When you’ve ruled out the other possibilities, you might have to take serious action on unpaid invoices. If a client constantly misses payments, that’s one too many red flags—it’s time to consider firing your client.

What happens if a customer still doesn’t pay an invoice?

If you’ve tried every method above to get a customer to pay, it’s probably time to explore legal action.

First off, you can hire an attorney to send a demand letter to your customer on your behalf. A message from your lawyers may just push your customer to pay their invoice.

But if that doesn’t work, your attorney can help you decide to file a lien or a lawsuit.

READ MORE: Accounts receivable collections: strategies for small businesses

While unpaid invoices are damaging to your business in the long run, taking legal action is expensive and best reserved for the most serious cases and most expensive jobs.

Get your invoices paid with the right tools

You can’t always stop them, but try to prevent unpaid invoices early on by communicating your payment terms clearly, making your payment process easy, and following up with customers.

Invoicing software can make that a lot easier. With a tool that lets you track invoice statuses, automate your follow-ups, and simplify your payment process, you’ll probably see fewer unpaid invoices.

That means better cash flow—and more flexibility to market, improve, and grow your business.

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