How To Prepare for and Address Unpaid Invoices

Learn the processes to protect your business’s cash flow

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As a sole proprietor or small business owner, being paid on time for your work is critical as you’re relying on that income to pay your personal and business expenses.

However, handling your financial obligations can be difficult if a client doesn’t pay on time, and even worse, ignores your invoices and follow-up correspondence. 

To combat this issue and potentially avoid having to contact collection agencies or schedule a date in small claims court, you should consider proactively implementing certain systems and processes to protect your business and its cash flow.

Key Takeaways

  • To be prepared for unpaid invoices, business owners should research prospective clients, develop a thorough invoicing system, and have a contract ready.
  • In the case of nonpayment, business owners should make sure to follow up regularly through text, email, phone, and even personal visits. 
  • If invoices still haven’t been paid after continued outreach, business owners can hire collection agencies or factoring firms, have an attorney draft and send a formal demand letter, or take the client to small claims court. 

How To Prepare for Unpaid Invoices

Preparation is pivotal to effectively managing your business finances. Here are some specific, proactive steps you can take. 

Research Your Clients

Getting prospective clients to agree to work with you is exciting because you’ll generate income and build a new business relationship—however, don’t forget to do your due diligence. This is a business relationship that needs to be mutually beneficial. You are providing a solution-based service for your client while they are helping you build your portfolio and putting cash in your pocket. 

Before you share a proposal with prospective clients, ask some pertinent questions like:

  • Are they listed on the Better Business Bureau
  • If you are working through a creative marketplace, what are their reviews? 
  • Do they have a Dun & Bradstreet Number? (This can help you ascertain the financial health and reliability of a prospective client.) 

Develop an Invoicing System 

An ideal way to track your invoices is to develop a system to manage them. Whenever you onboard a new client, discuss your invoicing process, which should include:

  • Payment due dates: On your invoice, list upcoming due dates to encourage clients to pay in a timely fashion. 
  • Payment methods: Will you accept Paypal? Zelle? Other online payment methods? In addition to online payment methods, cash, checks, credit cards, and money orders are acceptable forms of payment. Be clear about your preferred payment methods.  
  • Late-fee policy: Discourage late payments by charging a fee for payments made 10 to 15 days after the due date. 

Once a client has signed a contract, immediately send them an invoice that includes payment due dates and methods. 


Waiting to send out invoices can delay your payment process. You never want a sizable gap between when a project has been completed and your payment schedule. 

Entrepreneurs can utilize tools such as Honeybook, Quickbooks, or Kabbage, which will automatically send invoices to clients with integrated payment links. In addition, these services will also send follow-up emails to clients with outstanding invoices—making it easy for the business owner to manage their income. 

Have a Contract Ready

Whether you are doing work for a small business or your next-door neighbor, every client should sign a contract. A business contract can protect you and your client by outlining the expectations of your business arrangement, the scope of work, and the payment terms and methods. 

Follow Up Regularly

Whatever the reason, clients can forget to pay invoices on time. To address this issue, send a reminder a few days before the invoice is due via email, text, or both. 

If the invoice is not paid on time, follow up by sending another invoice. Include a polite message letting the client know their payment is past due. In your email, reiterate the acceptable methods of payment as well as any late fees included in your terms.


Make sure that you include your late fee schedule within your contract and invoices. In addition, when you send your follow-up emails, be sure to include your late fee policy.  

If your client is not responding to your emails and has yet to make a payment, it’s time to call them or pay a visit. During your call or visit, remain polite and provide guidance on how they can reach the agreed payment terms on their outstanding balance and resolve their account.

Take Further Action To Address Unpaid Invoices

If your client is still not paying you and ignoring your correspondence, there are a few actions you can take to potentially resolve the issue. 

Stop Your Work

If a client’s payment isn’t forthcoming, you have the right to stop working on their project. In your subsequent correspondence with the client, notify them that you have stopped the project and it won’t resume until the outstanding balance has been paid. If a business owner stops working on a meaningful project, clients may be more proactive in remedying the situation. 

Consider Third-Party and Other Options

If your client does not fulfill their contractual agreements and stops communicating, there are several avenues that you can take to get the money owed to you. 

  • Hire a collection agency: A collection agency can be an ideal option if a payment is over 90 days past due and you’d like to pass the collection duties to someone else. Typically, a collection agency works on a contingency basis and charges a flat rate depending on the amount owed and how much time has passed.
  • Factoring financing: If a client is not paying and the need for cash is urgent, you may want to consider factoring services. Factoring is when a third-party firm purchases your accounts receivable and gives you a cash advance based on unpaid invoices after deducting its fees. The factoring company will then collect the outstanding balance from your client. Factoring can be beneficial to small business owners as it saves time and effort, doesn’t require collateral, and can provide an opportunity for growth. An example of a company that provides factoring financing is Kabbage.
  • Send a letter from an attorney: Formal correspondence from an attorney demanding payment could compel clients to quickly contact you and arrange a payment plan. Hiring an attorney can be a costly, but effective method to expedite payment.
  • Small claims court: Suing a client in small claims court can be a quick, somewhat inexpensive option if the amount they owe isn’t too large. Guidelines for the amount owed and the process involved vary by state. In New Jersey, for example, small claims courts generally handle cases in which someone wants to sue for up to $3,000.


Calculate the full amount your client owes before deciding on the appropriate payment collection method. 

The Bottom Line

Even if your client finally pays, be careful about working with them in the future. In business, you will learn that not all opportunities to earn income are worth your time. However, by developing systems to manage your invoices so that your income stream flows smoothly, you can help maintain successful client relationships and hopefully avoid any monetary issues and discrepancies that come with them. 

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Better Business Bureau. "A Small Business Owners Guide to Collecting Unpaid Debts."

  2. The Kaplan Group Commercial Collection Agency. "How Much Does a Collection Agency Charge?"

  3.  NFIB. "Small Business Factoring: Advantages and Disadvantages."

  4. Law Offices of Kretzer & Volberding P.C. "Suing for Nonpayment of Services | Demand Letters & Legal Action."

  5. New Jersey Courts. "Small Claims Frequently Asked Questions." Page 1.

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