How to Deal With Slow-Paying Customers the Right Way

If your business invoices customers, you have likely faced cash flow challenges due to slow (or non) payment. Slow-paying customers are frustrating because they hinder your ability to meet expectations, replenish inventory and pay your team.

Over 26 years running a cybersecurity business, my company has invoiced over $100 million in services and products. When I exited in 2022, we had achieved a 98.7% collection rate. The only unpaid invoices belonged to customers who went out of business before we could collect.

This success was not due to software, charm or legal threats. It came from consistently following a structured collections process. Whether your invoices are $10 or $10 million, a disciplined approach is essential to ensuring continuous cash flow.

Related: Late Payments Are Crippling Small Businesses. Use These Strategies to Collect Your Money Sooner.

Payment pressure

Effective collections hinge on the consistent and respectful application of pressure. This approach positions your company as financially credible and communicates clearly that non-payment has consequences. Banks and credit card companies employ similar techniques successfully.

Demanding payment can be uncomfortable if customer relationships are close. It requires shifting interactions from social to transactional, which can be awkward for customers, especially if they are not directly responsible for payment. Thus, it is critical to keep collections and customer service separate.

1. Isolate collections responsibilities

The first step in building a formal collections process is to assign a bookkeeper, controller, accountant or similar back-office staff to manage all collections tasks — issuing invoices, communicating payment details, and sending collection notices. Avoid having customer-facing employees perform these tasks, ensuring their focus remains on nurturing positive relationships.

If customers express invoicing frustrations to customer-facing staff, direct these complaints to your dedicated collections person. Your team will appreciate this clear separation.

Owners or founders should also distance themselves from collections, only intervening if legal action becomes necessary. Separating these duties presents your business as organized and robust. In contrast, having salespeople or founders begging for payments signals weakness, reducing customers’ urgency to pay.

2. Clearly define payment terms

Payment terms should be explicit in all customer agreements, including invoices, contracts, purchase orders and quotes. Simple, clear language is essential. Consult with a lawyer or finance professional to get this language correct. However, some key elements include:

• Payment terms: Specify the timeframe clearly, such as NET30, meaning payment due within 30 days. Businesses with tight margins might require immediate payment or prepayment.

• Consequences for non-payment: Clearly state potential penalties for late payments. For example: “Client shall pay all invoices within 30 days of receipt. Failure to pay, regardless of reason, may result in (a) late payment fees amounting to 2% of the outstanding balance, (b) cessation of ongoing work and (c) withholding of all outstanding services and deliverables until invoices are fully settled.”

• Payment instructions: Detail precisely how and where payments should be made, including check recipient names.

Related: 5 Surefire Ways to Get Clients to Pay on Time

3. Document your invoicing process

The next step is to document and formalize your internal invoicing procedures. Some items to include:

• Roles: Clearly designate responsibilities for invoice generation, sending and collections. Initially, one person might handle these tasks, but duties can be separated as your business grows.

• Invoice day: Set a regular weekly or monthly invoice issuance date. Consistency helps avoid confusion.

• Pre-invoice deadlines: Define deadlines for internal data (like consultant hours or inventory usage) needed for invoicing. Clearly state the consequences for employees who fail to meet these deadlines.

• Invoice methods: Send invoices through multiple channels (email, physical mail, text), ensuring customers cannot easily claim they never received an invoice.

• Collections report: Regularly maintain a collections report detailing outstanding invoices and their aging status. As the owner, review this report weekly with your finance team.

4. Implement an escalating pressure process

The final step is to define and consistently follow a collections pressure process. This lays out how you will escalate the urgency and formality of communications with slow-paying customers. Here is a sample, five-step escalation process with associated communication tasks:

1. Past due (1-15 days late):

   • On day 15, send an email to politely inquire about payment status.

   • Resend invoice with email.

2. Late (16-30 days late)

   • Weekly, send an email asking for payment details, including all outstanding invoices as well as an account statement showing the outstanding balance.

   • On day 28, call the customer to inquire about payment.

3. Delinquent (31-90 days)

   • Twice per week, email the customer stating the account is delinquent. Send all outstanding invoices as well as an account statement with the phrase “ACCOUNT PAST DUE” prominently displayed on the statement.

   • Each week, call the customer and demand payment. Require the customer to provide a check number, amount and the date the check will be sent.

4. Account hold (90-120 days)

   • Weekly email stating the customer’s account is on hold, no further business is possible, and all services and licenses are suspended until payment in full on all outstanding balances is made. Resend all invoices and account statements. Display “ACCOUNT ON HOLD” on all statements and invoices.

   • Weekly call to demand payment. Require payment details to release any work or licenses.

   • On day 100, contact the service delivery manager. Inform the manager that the customer’s account is on hold and no further work can be performed. Also, instruct the manager to suspend the customer’s licenses in five days unless payment is received.

   • Begin charging monthly late fees to the account.

5. Litigation (beyond 120 days):

   • Send final email warning. Set a final deadline 5-10 days out.

   • Call and ask for payment, threaten legal action.

   • After the deadline, transfer the account information to legal counsel for litigation.

   • Contact the service delivery team to cancel the customer’s accounts and licenses.

Naturally, you will want to customize this escalation to reflect your internal operations and the communications methods used.

Related: How to Talk to Customers in Default the Right Way

Considerations on litigation

While litigation is sometimes inevitable, it is best to avoid suing non-paying customers. Legal action often consumes more resources than it recovers. Instead, it might be better to dismiss the debt and discontinue service to chronic offenders. Litigation should be reserved only for severe cases.

However, maintaining a structured collections process typically reduces the need for lawsuits and significantly improves your cash flow.

Effective cash flow management is critical for business survival. Implementing a disciplined, formal collections process ensures prompt payments and financial stability, letting you focus on growth rather than chasing invoices.