Customer not paying? Here's what you can do

An unpaid invoice is more than just an inconvenience; it can affect cash flow, take up valuable time, and if left unresolved, eventually affect the value of the debt shown in your accounts.

The good news is that an overdue invoice doesn’t automatically mean a bad debt. If a customer isn’t paying, start by understanding why the payment is late, then escalate gradually if need be.

This blog breaks down how to reduce the risk of non-payment, how to chase an unpaid invoice, and when to turn to legal action as a last resort. It also covers accounting implications, including VAT bad debt relief and doubtful debt provisions.

Customer hasn’t paid? Check these things first

If a customer has not paid their invoice, before escalating, consider what type of late payer you’re dealing with. Is this a customer who regularly pays late, someone who has simply forgotten, or a customer experiencing cash-flow difficulties? It’s key to establish why the invoice might not have been paid before taking additional steps.

Before chasing payment, check:

• Was the invoice sent to the right person?
• Are the amount, details, and payment reference correct?
• Were the payment terms clearly agreed?
• Has the customer raised a query that hasn't been resolved?

Also, check their payment history. If a reliable customer suddenly hasn’t paid, there may be a genuine issue needing attention.

A quick phone call is often more effective than sending repeated emails, particularly if you need to uncover what is holding up payment.

Always record what is agreed, including any new payment date, and confirm important conversations in writing.

Reducing the risk of unpaid invoices

You can take steps to help prevent non-payment, such as structuring your invoices to reduce the risk of them falling overdue.

For example, your finance team should be making payment as straightforward as possible by:

• Agreeing clear payment terms upfront
• Including those terms in your contracts
• Making invoices clear and easy to pay, with multiple payment methods available
• Considering deposits or staged payments for larger projects
• Monitoring outstanding invoices regularly

Good invoicing and bookkeeping processes also mean you can spot overdue balances earlier, giving you a better chance to resolve the issue before it becomes bad debt.

What is bad debt?

A bad debt is money a customer owes your business that you no longer reasonably expect to recover. Unlike an invoice that is simply overdue, it is considered uncollectable rather than just late.

Chasing and escalating an unpaid invoice

If preventative techniques haven’t worked, you may need to escalate your approach to chasing the invoice.

A typical process might look like this:

• Just after the due date: Send a friendly reminder, attaching a copy of the invoice and asking whether anything is preventing payment.
• If the payment still doesn't arrive: Call the customer and establish if there is a reason for the delay.
• If the invoice remains overdue: Send a firmer written reminder that clearly states the amount owed, how overdue the invoice is, a payment deadline, and what will happen if payment isn't received.
• If you still receive no payment: Consider a final demand, and whether further action is worthwhile.

Can you write off a bad debt and get the VAT back?

Potentially. HMRC allows VAT-registered businesses to claim VAT bad debt relief where its specific conditions are met. These include:

• You have already accounted for and paid the VAT to HMRC
• The debt satisfies the relevant six-month requirement
• You have properly written the debt off in your VAT accounts
• Your claim is within HMRC's time limit

HMRC also says that the relief generally needs to be claimed within 4 years and 6 months of the later of the payment due date and the date of the supply.

What is doubtful debt?

If you’re no longer confident that an invoice will be paid, you may need to consider how this is reflected in your accounts.

A doubtful debt provision reflects uncertainty about how much of an outstanding invoice you will collect, helping your accounts show what you realistically expect to receive. It doesn’t make the invoice itself disappear and isn’t necessarily the same as formally writing off the debt.

Regularly review your outstanding invoices and how long each has been unpaid. An aged receivables report groups these balances by how long they have been outstanding, helping you identify which invoices need closer attention.

When should you consider legal action?

Legal action should be a last resort, especially if there’s still an opportunity to resolve the situation without damaging the customer relationship.

If other attempts have failed, consider:

• The value of the outstanding debt
• The evidence you have
• Whether the customer is engaging
• Whether they're realistically able to pay
• Whether pursuing the debt makes commercial sense

When might the small claims process be an option?

For businesses in England, the small claims process can be used for certain claims of up to £10,000, including money owed for work carried out. Court fees do apply, so it’s important to weigh the potential recovery against the cost of pursuing it.

As accountants, we do not provide direct legal advice on these matters. If you need legal assistance, contact a reputable solicitor, or Gravitate can put you in touch with one.

Don’t wait until an unpaid invoice becomes a cash-flow problem

An overdue invoice is easier to handle when you catch it early.

If a customer hasn’t paid, start by checking the invoice and speaking to the customer. If the problem isn’t resolved, escalate your reminders and keep a record of your attempts to recover the debt.

Only escalate further if necessary and keep your response proportionate to the amount owed and the circumstances. There are several ways that you can deal with an unpaid invoice before escalating to legal action.

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Are you finding yourself with cash tied up in unpaid invoices? Get in touch to discuss your invoicing processes and how unpaid balances are reflected in your accounts.