For any kind of small business, few things can throw gum into your works like a late payment. After all, your bills come regularly – so it’s an issue when your payments don’t. When late payment goes too far, you may get to the stage where you need to send out a warning letter for outstanding payment.
This article shows you how to do so. We’ve also included a downloadable ZIP file containing late payment demand templates. You can download it here.
Late Payment Realities
Sadly, late payments are a really common issue for small businesses and freelancers.
The freelance software company Bonsai reports that 29 per cent of invoices on their platform are paid late to freelancers. Thankfully, however, 75% of invoices are paid within 14 days of the due date and 90% are paid within a month.
So what do you do when a payment is radically overdue?
Obviously, the hope is that you don’t arrive at that stage; Routinely and consistently following up with polite reminder emails and phone calls is usually enough to obtain payment from most clients. I cover that in more detail below. However, sadly it sometimes becomes necessary to make everything rather more formal.
That’s when you send what’s known as a “Demand Letter” in the U.S. It’s known as a “Letter Before Action” in the U.K. (If you’re elsewhere, be sure to check the correct legal wording for your country).
Let’s first look at the templates for overdue payment reminder letters. Then you can read on to find out how to potentially avoid getting to the point of having to send such letters.
Warning Letter for Outstanding Payment Template
The first step is to send a letter letting the overdue client know about their late payment, and possibly any late fees you use. My warning letter for outstanding payment to a client looks like this:
To Whom It May Concern:
I have included my invoice(s) for [work performed] in [month(s)] for [Their Company/Website].
I have not seen payment for the [work performed] on [invoice(s) [XXX]], and that invoice was due on [due date]. Please note that I’ve instituted at 1.5% late fee for each month that an invoice is past due, which means that fee would apply [date the fee applies]. I’ve updated the invoice(s) to reflect the possible late fee.
If we need to work out smaller payments at regular intervals, we can discuss a plan and potentially waive any late fees.
If you have any questions or concerns, feel free to contact me.
[My letter header and footer have my contact information]
I usually send this letter about five business days after the invoice’s due date (to give payment time to arrive) and keep sending similar wording once per week, if needed, throughout the month before the fee hits.
If you’re in the U.K., there is some additional legal wording you can use to sound more official. The Late Payment of Commercial Debts regulations allow you to charge interest at 8% above the Bank of England base rate. Full details of those regulations are here.
Here is an example of the additional wording you can use:
“In accordance with the Late Payment of Commercial Debts Regulations 2013, we are permitted to add interest and late payment compensation to the sum outstanding. This is calculated based on the Bank of England base rate plus 8%. This currently equates to £xxx. Therefore, the amount to pay as at today currently stands at £xxx.”
Usually, a warning letter for outstanding payment to a client will get the client in gear to avoid paying extra.
If it does not, you then move onto the Demand Letter (U.S.) or Letter Before Action (U.K.), which serves the purpose of informing the client that they may be liable to legal action or debt collection to recover the overdue amount.
- The amount of late payment interest you can legally charge will depend on your country and state. Be sure to do additional research if you plan to exercise this right.
- You are in no way obliged to offer staged payments, so think carefully before doing so.
- These templates are for guidance only. If in any doubt, consult a legal professional.
Demand Letter and Letter Before Action Templates
When writing a Demand Letter or Letter Before Action, there is one major tip to always keep in mind: stay polite. You should sound firm, but never sound angry or offensive. Offending the other party will not make them want to pay any faster!
Beyond that, in the U.S., the Demand Letter should summarize what has happened, since if you end up in small claims court, it can actually be used as evidence for your case.
Your letter should also contain a specific demand – essentially for the amount of money the client owes you. The final step is to outline what will happen if your demands are not met, such as taking the client to small claims court.
As such, your Demand Letter will look something like this:
Dear [Name of Client],
I am writing because you have not provided payment by the deadline of [date]. Please see the attached invoice detailing the outstanding sum you owe.
On [date] I completed [the service you completed or product you provided], which was provided per our agreement.
The total balance that is currently due is $xxx. It is important that I hear what your plans are for paying this balance.
I will allow 10 business days for you to make payment arrangements, until [date]. If I do not hear back, I will be submitting this against you in small claims court (or submitting to a collection agency, whichever your policy for late payments is).
[Contact Information, including email, phone number and a business name, if you have one]
In the U.K., the letter looks very similar. There are just slight wording changes based on how the legal side is handled in the U.K.
Outstanding Invoice(s) – [The Company’s Name]
Final Letter Before Action
We see that you have not paid your outstanding invoice(s). You still owe [£ XXXX Amount], for [invoice XXX], which was dated [invoice date] and due [due date]. (You can put a chart format here if multiple invoices are due.)
Please note, if the full payment of [Total Amount] is not in our bank account by [Date – can be five to 10 working days from the date letter is sent], we will begin legal action to recover the past due amount total, courts costs and statutory interest of 8% above the Bank of England base rate (fixed for the six-month period within which date the invoice became overdue).
[Note: instead of legal action, you may state that you will turn the debt collection over to a third-party debt collection agency.]
Please pay in full now to prevent legal action.
We apologize if you have paid in the last 24 hours.
This is our final communication regarding this late payment.
[Contact Information, including email, phone number and a business name, if you have one]
How to Avoid Having to Send a Warning Letter for Outstanding Payment
Getting to the point of sending a warning letter for outstanding payment is a huge pain for any freelancer. Who wants to deal with debt agencies and legal cases if the letter doesn’t get a response?
So, below are some tips for not having to even go there.
First, make sure you have a late payment interest policy. Typically (in the US) this can be is 1.5 per cent interest for every month after the invoice due date, according to the Freelancer’s Union.
You should also keep communication open and consistent with these tips:
- Make your payment terms very clear from the start, and enforce them consistently.
- Put late payment policies in your contract or invoice.
- Remind the client about the invoice as the due date approaches. Something simple can work, like “Just a friendly reminder that this invoice is due on [date].”
- Check in again a few days after the deadline, just to give a reminder again or ask for an update.
- Remember to check in weekly reminding about late interest for the first 30 days late if you don’t get a response.
- Phone calls can yield better responses than emails. You come across as more human and less easy to ignore than a slew of letters and emails.
- Get to know the financial director or whoever actually pays the invoices at every company – a friendly relationship with this person will pay dividends!
Again, always stay friendly and professional. Say something like, “Don’t hesitate to contact me if you have any issues or concerns,” and provide easily visible contact info.
Cash Flow Options for Freelancers
When you’re self-employed, late payments will happen. If you keep up on client communication, you can mitigate them, but it is part of the nature of freelancing at times.
Even if you have the most perfect clients, work can come in bursts. So, when your payments are infrequent in a world with frequent bills, you need to find ways to keep your cash flow steady.
One idea is to try to have six months’ of monthly expenses in a specific savings account. Then if a payment is late, you basically take a loan out from your savings account to pay the bill and then replenish your account when that payment comes. You can also “borrow” from it when work is slow, and then stock it back up during the busy times.
Savings accounts aren’t the perfect option, however. A large emergency expense can wipe the thing out. You may want to have a credit card as a backup.
There’s also the option of business overdraft – an agreed facility from the bank that allows you to withdraw beyond your available funds. Different rates can apply to these, and they can get expensive. Most expensive of all is an unauthorised overdraft – so if you think you’ll need the facility, get it organised before you need it!
Cashflow for freelancers goes up and down. It’s just a part of the freelance lifestyle. Hopefully, the need to send a warning letter for outstanding payment will be a rare one for you – but why not bookmark this page for when you need it – just in case!
You can download the late payment letter templates here.
- Need to get your small business finances properly organised? Grab a free trial of FreshBooks and start right now.
- Want to know the best way to create invoices that will get you paid on time, check out this article.
Michelle Lovrine Honeyager is a freelance writer who has written features for a number of consumer and industry print magazines, as well as stories for niche websites, digital lifestyle magazines and general news sites.