When an invoice remains unpaid despite multiple follow-up attempts, you enter the collections phase. This is the last resort — the structured process for recovering payment when all informal efforts have failed.
When to Start the Collections Process
Transition from follow-up to collections when:
- The invoice has been overdue for 30+ days with no response to reminders.
- The client has acknowledged the debt but repeatedly failed to pay.
- The client has become unresponsive to all communication attempts.
- The amount outstanding is significant enough to justify the collection effort.
Internal Collection Steps
Step 1: Formal Demand Letter
Send a formal written demand stating: the exact amount owed, the original invoice date and due date, a history of previous collection attempts, a firm deadline for payment (typically 10 business days), and consequences of non-payment (service termination, collections agency, legal action).
Step 2: Service Suspension
For recurring services, suspend service delivery after providing written notice. Many clients pay immediately when service is actually interrupted. Always follow your contract terms regarding suspension procedures.
Step 3: Senior Contact Escalation
If you have been dealing with an accounts payable contact, escalate to a decision-maker. A brief, professional email to the company owner or CFO often resolves what months of AP correspondence could not.
External Collection Options
Collection Agencies
Collection agencies specialize in recovering unpaid debts. They typically charge 25-50% of the recovered amount. Consider a collection agency when internal efforts have been exhausted, the amount justifies the agency's fee, and you are willing to potentially end the client relationship.
Small Claims Court
For debts under the small claims limit (varies by jurisdiction, typically $5,000-$10,000), you can file without a lawyer. The process involves filing a claim, serving the defendant, and presenting your case. Bring your contract, invoices, delivery records, and communication history.
Legal Action
For larger amounts, consulting a business attorney may be appropriate. A lawyer's letter often prompts payment, and litigation is available as a last resort. Weigh the cost of legal action against the amount owed before proceeding.
Writing Off Bad Debt
Sometimes, despite all efforts, an invoice will not be collected. When to write it off:
- The cost of further collection exceeds the invoice amount.
- The client has gone out of business or filed for bankruptcy.
- You have exhausted all reasonable collection options.
Bad debt write-offs are generally tax-deductible. Consult your accountant for proper documentation and timing of write-offs.
Preventing Future Collection Issues
- Screen new clients — check references and credit history for large engagements.
- Require deposits for new client relationships and large projects.
- Use shorter payment terms and enforce them consistently.
- Automate reminders so follow-up happens immediately, not weeks later.
- Address payment issues early. A 7-day-old problem is much easier to resolve than a 90-day-old one.
- Document everything. Contracts, invoices, delivery confirmations, and communication records are your evidence if collections escalate.