An overdue invoice can be a major drain on a company's liquidity. Therefore, it is important to take immediate action as soon as an invoice is overdue so that you get paid as soon as possible. Here we show you how to deal efficiently with overdue invoices.
What is an overdue invoice?
An overdue invoice is when a customer or business partner does not pay an invoice within the deadline. Default occurs as soon as the deadline on the invoice expires: it is then overdue.
For companies, overdue invoices are a burden on liquidity. On the one hand, the company has already rendered a service for which it demands payment and has thus gone into pre-financing. On the other hand, it is now waiting for its income from the payment because it has to cover its running costs and pay invoices itself.
If a company has many overdue invoices, this can even lead to cash shortages because there is too little revenue to finance operations. It is therefore important to claim an invoice as soon as it is overdue.
When is an invoice overdue?
If you write a payment deadline on the invoice, for example "Payable within 14 days of receipt", the invoice is overdue as soon as this deadline has passed. If an invoice is dated 05/06/2022 and the deadline is 14 days, it is overdue from 20/06/2022.
If you do not write a payment deadline or payment date on the invoice, the legal regulation applies, which is 30 days according to UK law. From the 31st day after the invoice date, the invoice is overdue.
How long can an invoice be overdue?
Companies can reclaim overdue invoices for up to six years before the invoice expires. This means that after six years, the customer or business partner no longer has to pay the invoice.
How to handle an overdue invoice
As soon as an invoice is overdue, you should remind the customer or business partner of the payment by e-mail. In most cases, you don't have to do anything more, because often customers have simply forgotten to pay the invoice and will pay it immediately when they receive a payment reminder.
However, it can also happen that customers or business partners cannot pay because they have liquidity problems or simply do not want to pay. In these cases, a payment reminder comes to nothing.
A company then has the option of hiring a collection agency or a lawyer, who can also use legal means to obtain the outstanding invoice amount. Overdue invoice reminder & template
If it is the first payment reminder, choose a friendly and courteous tone so that the relationship with the customer or business partner is not unnecessarily strained and they do not feel put out. An overdue invoice template could look like this, for example:
Hi [Client's name], We haven't received payment for invoice xyz, due on xx/yy/zzzz, with an overdue payment of £100.00. We kindly ask you to check your accounts, and if payment has not been made yet, to do so until xx/yy/zzzz. In case you haven't received the invoice, please find it attached. Kind regards, [Your name]
If this payment reminder remains unanswered and the customer or business partner continues not to pay, you may become more demanding in your tone in the next payment reminder, because after all you want to receive your payment:
Hi [Client's name], We contacted you on [Date when 1st reminder was sent] regarding the overdue invoice xyz. We have still not received payment yet. We ask you to pay within 7 business days, or we will have the amount collected by a collection agency at your cost. As your payment is 90 days late, an interest rate of 8% is added as a fee to the overdue amount. Your payment owed is, thus, £101.31.
How to calculate the interest rate
You are permitted to charge interest on arrears from 30 days after the expiry of the invoice period. The maximum amount of interest for late payment is 8% plus the Bank of England base rate. The base rate fluctuates and is currently 3.00%. You may therefore charge a maximum of 11% interest on arrears. For the calculation, proceed as follows:
Annual interest payment = Amount to be paid / 100% x interest rate Amount to be paid including interest = Amount to be paid + Annual interest payment / 365 x days invoice is overdue
For the above example, where an invoice amount of £100 is due and an interest rate of 8% is applied, the result is as follows:
Annual interest payment = £100 / 100% x 8% = £8 Amount to be paid including interest = £100 + £8 / 365 x 60 = £101.31
How to collect overdue invoices if the client refuses to pay
Sometimes it happens that even after several payment reminders the customer does not want to pay. In this case, the only way to get your money is to take legal action. You can contact a collection agency or a lawyer who specialises in debt collection.
In both cases, efforts will first be made to collect your claim out of court. If this attempt also fails, legal proceedings may be initiated. To do this, you must prove that you have already exhausted all out-of-court possibilities to get your money. Therefore, keep all payment reminders and correspondence with the parties involved.
To recover your debt in court, make a County Court Claim for the overdue invoice. Your debtor will then be ordered by the court to pay, or may enter a defence if they believe the invoice is unlawful. In this case, there will be a court case.