Late payments are one of the most frustrating challenges for any business owner. You’ve done the work, issued the invoice, and waited patiently, yet the money still hasn’t landed in your bank account.

Managing bad debt is not just about chasing invoices; it’s about protecting your cash flow, maintaining professional relationships, and knowing when to escalate.

Here’s how to handle unpaid invoices step-by-step and reduce the risk of bad debt in the future.

 

Start with a Clear Credit Control Process

Before you can manage late payments effectively, it’s worth taking a step back and looking at your credit control process.

 

What is credit control?

Credit control is the process of managing how and when customers pay you. It covers everything from setting payment terms and checking a client’s ability to pay to issuing invoices, sending reminders, and following up on overdue payments.

Without good credit control, even profitable businesses can struggle with cash flow — because money tied up in unpaid invoices can’t be used to pay staff, suppliers, or invest in growth.

 

What does a typical credit control process look like?

In most well-run businesses, credit control follows a clear structure:

Set expectations early – Agree on your payment terms before starting any work. 

Check creditworthiness – For larger projects or new customers, consider running a credit check or asking for a deposit.

Invoice promptly – As soon as the work is completed or the product delivered, send your invoice. Any delay in invoicing often leads to a delay in getting paid.

Track and follow up – Monitor due dates and send reminders before and after the payment date. Most accounting software, like Xero, lets you automate this process, saving time and ensuring nothing slips through the cracks.

Escalate when needed – If a payment is late, have a clear plan for when to chase, when to make a call, and when to pause work or take further action.

These small but consistent habits set clear expectations, reinforce professionalism, and drastically reduce the likelihood of late payments.

 

Send a Friendly Reminder

If a payment is a few days overdue, the first step is to reach out with a polite reminder. In many cases, late payments are not intentional – clients might have missed the invoice, made an admin error, or simply forgotten to process it.

The key here is tone. Your reminder should be friendly, professional, and assume good intentions. You’re not accusing; you’re prompting.

In your email, you should:

Acknowledge the overdue payment in a calm, factual way – e.g. mention the invoice number, date, and amount due.

Reconfirm your payment terms and politely ask when payment can be expected.

Attach the invoice again to make it easy for the client to act straight away.

Offer help if needed — for example, check if they require a purchase order number or a reissued invoice.

This type of message serves as a gentle nudge that keeps communication open while reinforcing that you’re monitoring payments. Often, that’s all it takes to get things moving without damaging the client relationship.

 

Pick Up the Phone

If your polite reminder hasn’t had an effect, the next step is to pick up the phone. A short, professional conversation can often resolve things faster than a string of emails.

Hearing a real voice creates accountability and gives you valuable context — within a few minutes, you can usually tell whether the client simply forgot, is experiencing a temporary cash flow issue, or is avoiding payment altogether.

When you call, keep your tone friendly and curious rather than confrontational. The aim is to understand the situation, not to demand payment aggressively. Ask open questions, listen carefully, and agree on what happens next — for example, when will payment will be made or whether you need to resend an invoice.

Once you’ve spoken, follow up in writing to confirm what was discussed and agreed. This provides a paper trail and ensures everyone is clear on the next steps.

Handled well, a phone call can actually strengthen your client relationship. It shows that you’re proactive, reasonable, and organised – while also reinforcing that you take payment seriously.

 

Escalate: Formal Reminders

If payment still hasn’t come through after a week or two:

Send a second reminder—firmer in tone, restating your terms.

Explain that if payment isn’t received by a specific date, further action will be taken.

Consistency and clear communication are key here. You’re signalling that you take payment seriously without being aggressive.

 

Pause Work or Services

For ongoing clients, it’s reasonable to put further work on hold until outstanding invoices are paid.

This step can feel uncomfortable, but it often prompts a quick resolution. You can phrase it professionally: “As per our terms, we’ve paused ongoing work until the account is brought up to date.”

This approach protects your time and ensures you’re not extending further credit to a non-paying customer.

 

Send a Letter Before Action

If reminders and phone calls fail, the next step is to send a Letter Before Action (LBA).

This is a formal letter stating that unless payment is received by a specific deadline, you’ll begin legal proceedings to recover the debt.

It’s often enough to prompt payment – many clients pay as soon as they realise legal action is imminent.

 

Use a Debt Collection Agency or Legal Action

 As a last resort, you can:

Instruct a debt collection agency to recover the funds on your behalf.

File a small claims court case if the amount justifies the effort and cost.

Keep in mind that legal processes can take time and incur fees, so weigh the potential recovery against the effort and impact on your relationship with the client.

 

Write Off as Bad Debt (When Necessary)

Sometimes, despite your best efforts, a payment simply can’t be recovered. When it becomes clear that you’re unlikely to receive the money, it’s important to recognise it as a bad debt and account for it properly.

 

When you can write off a debt

A debt can be written off when it’s genuinely irrecoverable, for example if:

The customer has gone out of business or been declared insolvent.

Repeated reminders and formal collection efforts have failed.

It’s not commercially worthwhile to keep chasing payment (for instance, the amount owed is small compared to the cost of pursuing it).

 

How to record it in your accounts

Once you’re confident the debt won’t be recovered:

Remove it from your accounts receivable (debtors).

Record it as a bad debt expense in your profit and loss statement.

If the customer later pays, you can simply reverse the write-off and record the payment as income

 

VAT and bad debt relief

If you’ve already accounted for and paid VAT on a sale that later becomes a bad debt, you may be able to reclaim the VAT under HMRC’s Bad Debt Relief rules.

To qualify:

At least six months must have passed since the later of the due date or the date of supply.

The debt must have been written off in your books.

The amount must not have been paid, sold, or factored to a third party.

You can reclaim the VAT on your next VAT return by making an adjustment in Box 4 (VAT reclaimed on purchases). This ensures you’re not left out of pocket for VAT on income you never actually received.

 

Keep your records clear

Always retain documentation showing:

The original invoice and its due date.

Details of the steps you took to recover payment.

The date and reason the debt was written off.

Good record-keeping makes the write-off process smoother and ensures you’re fully compliant if HMRC ever requests evidence.

 

Final Thoughts

Dealing with unpaid invoices can be stressful, but having a clear escalation process helps you stay in control.

At de Jong Phillips, we help agencies set up strong financial systems that reduce the risk of bad debt and keep cash flowing smoothly.

If you’d like to review your credit control process or automate reminders through your accounting software, get in touch – we’d love to help.