How to Handle a Customer Who Won't Pay

Step-by-step process to collect overdue payments, minimize losses, and protect cash flow when customers default.

1. Send payment reminders at 15, 30, and 45 days. Email automated reminders with invoice copies and payment instructions. Keep tone professional but increasingly firm. Track response rates—most paying customers respond by the second reminder.
2. Make direct contact at 60 days past due. Call the customer directly to discuss payment. Document the conversation and any payment commitments. If they claim financial hardship, negotiate a payment plan in writing before proceeding.
3. Send formal demand letter at 90 days. Mail a certified demand letter stating the amount owed, payment deadline (typically 10-15 days), and consequences of non-payment. This creates a paper trail for potential legal action and often prompts payment.
4. Engage collection agency or attorney. For debts over $500, hire a collection agency (takes 25-50% commission) or attorney. For smaller amounts, use small claims court if filing fees are under 10% of the debt amount.
5. Write off uncollectable debt. After 120-180 days of collection efforts, write off the debt as bad debt expense for tax purposes. Keep detailed records of collection attempts—you may still collect later while claiming the tax deduction.
6. Implement credit policies to prevent future losses. Require credit applications for accounts over your threshold, check references, and set credit limits. Consider requiring deposits or payment terms like net 15 instead of net 30 for new customers.