Getting paid should be simple. You did the work. The invoice went out. Now the money needs to move.
But roughly 30% of small businesses carry more than $20,000 in unpaid invoices at any given time. Most of those aren't fraud. They're disorganized clients, cash-flow crunches, and invoices that slipped through the cracks.
A solid accounts receivable management process fixes that. Not by being aggressive, but by being consistent. The steps below cover how to collect without burning a relationship.
What is an accounts receivable collections process?
It's the set of steps you take to recover unpaid invoices. A real process starts before anything is late. It includes clear payment terms, a scheduled reminder cadence, and defined escalation steps for invoices that go past due. Businesses that send a reminder within 3 days of a due date collect 60% faster than those who wait a month. The goal isn't just to get paid once. It's to build habits that keep receivables current across every client.
Key Takeaways
- Collections starts before an invoice is late: the terms you set at the start of a relationship define every conversation that follows
- A structured cadence outperforms ad-hoc follow-up: reminders at +7, +14, and +30 days get results; a single email does not
- Every escalation message should name specifics: invoice number, dollar amount, and original due date in every follow-up
- Write-offs are a last resort: most invoices past 90 days can still be collected with a phone call and a payment plan offer
- Growthy surfaces overdue AR via an aging report: the actual outreach is handled by your bookkeeper or a tool like Bill.com
Set Terms Up Front
Collections doesn't start when an invoice is late. It starts on day one.
Your engagement letter or statement of work should answer three questions: when is payment due (Net 15, Net 30, etc.), how can the client pay (ACH, card, check), and what happens if they don't (typically a 1.5% monthly late fee after 30 days).
Clear terms make follow-up easier. You're not asking a client to do something unexpected. You're reminding them of what they already agreed to.
What Goes in the Payment Terms
At minimum, your terms should include:
- A specific calendar due date, not just "Net 30"
- Accepted payment methods
- Late fee policy (1.5% per month is standard)
- A short dispute window (5 to 7 days to raise questions about the invoice)
Invoices with a specific due date get paid 14 days faster than invoices that say "due upon receipt." That one change alone moves the needle.
Consider an Upfront Deposit for New Work
For project-based work or new client relationships, ask for 25 to 50% upfront. It filters out low-intent clients and cuts your average days-to-collect on the remaining balance by 12 to 18 days.
The Reminder Cadence
Most unpaid invoices aren't intentional. They're buried in someone's inbox or caught in an approval queue. A consistent reminder sequence solves that without any awkwardness.
Step 1: 3-5 Days Before the Due Date
Send a friendly heads-up. Keep it to two sentences. "Your invoice for $X is due on [date]. Here's the payment link." No urgency. No guilt. Just a clean reminder with the details in plain view.
Step 2: On the Due Date
One-line nudge. "Today is the due date for invoice #1234 for $X. Let us know if you have questions." Include the payment link again.
Step 3: 7 Days Overdue
This is the first real follow-up. Put the dollar amount in the subject line: "Invoice #1234, $3,500: 7 Days Past Due."
In the body, assume good faith. "If you've already sent payment, ignore this. If you haven't, we'd appreciate hearing from you by [date]." Give them a clear out and a deadline.
Step 4: 14 Days Overdue
Two touches this week: email and a phone call. Every message names the invoice number, the amount, and the original due date. Be direct but professional.
At this point, flag the invoice in your AR aging report. You want it visible in the 1-30 day bucket before it slips into the 30-60 range.
Step 5: 30 Days Overdue
This is your last standard attempt before escalation. Send a clear email with a specific response deadline: "Please remit by [date + 10 days]." Consider a physical letter for invoices over $2,000.
Before drafting these messages, check the payment reminder templates for the exact language at each stage.
Escalation Steps
If 30 days of follow-up produces no response or broken promises, it's time to escalate. You have four options.
A formal collections letter. One page that states: the invoice number, the original due date, the amount owed, what you've done to collect, and a final payment deadline. No legal threats needed at this stage. Just documented facts.
A payment plan. For a long-term client with a temporary cash problem, offer to split the invoice. A $6,000 balance paid over 3 months is better than zero. Put the agreement in writing.
A third-party collections agency. For invoices over $1,000 that are 60+ days overdue with no response, an agency is worth considering. They typically take 25 to 40% of what they recover. That's often better than writing it off.
Small claims court. For invoices under $10,000 (limits vary by state), small claims is fast and low-cost. You don't need a lawyer.
Formal Collections Letter: What to Include
Every formal collections letter needs: the exact invoice number, the original due date, the total amount owed, a brief summary of your prior contact attempts, and a new response deadline (10 business days is standard).
When to Offer a Payment Plan
Offer a payment plan when you have a good prior relationship and this looks like a one-time cash crunch. For a client with a pattern of late payments, skip the plan and go to the agency or court route instead.
Tools like Bill.com and Invoiced can automate the dunning sequence at the escalation stage. They send scheduled follow-ups, track delivery, and log every touchpoint.
When to Stop, Reserve, or Write Off
At some point, you have to make a call.
Most accountants recommend creating an allowance for doubtful accounts when an invoice hits 90 days overdue. You're not writing it off yet. You're acknowledging you might not collect. This reserve shows up as an expense on your P&L.
Allowance for Doubtful Accounts
The reserve method matches the expected loss to the period when the revenue was earned. You estimate a percentage of AR that won't collect (say, 3% of total) and book that as an expense. The direct write-off method skips the estimate and records the loss when you confirm it's uncollectable. Most small businesses on accrual basis use the reserve method.
Bad Debt Expense
At 120 days with no contact and no payment, most small businesses write the invoice off. A $5,000 write-off hits your P&L directly. The IRS allows the deduction, but only when the debt is actually worthless. If you're on cash basis, the rules are different. Talk to your bookkeeper.
Before you write anything off, pull your AR aging report and review every invoice over 60 days. See how to write off bad debt for the exact accounting steps.
Keeping the Relationship Intact
The best collections process is the one clients barely notice.
Most late payments aren't malicious. A client is dealing with a cash crunch, a missed approval, or a rough payroll week. Your tone should reflect that assumption.
Every follow-up message should:
- Name the specific invoice (number, amount, date)
- Assume good faith
- Give the client an easy path to respond
- Stick to facts, not blame
"Invoice #1234 for $3,500 due April 1 remains unpaid as of today" is factual and professional. "You still haven't paid us" is not.
Clients who go through a collections process and still pay often become long-term relationships — if they felt treated with dignity throughout.
Frequently Asked Questions
How long should I wait before sending a formal collections notice?
Don't wait 90 days. If your +7 and +14 day reminders go unanswered, send a formal notice at 30 days with a specific response deadline. The longer you wait, the harder the conversation becomes.
What should I include in every AR follow-up email?
Every message needs: the invoice number, the amount owed, the original due date, a payment link, and a specific deadline to respond. Vague messages get vague results.
Does going through the collections process hurt the client relationship?
It depends on how you handle it. A calm, documented process rarely burns bridges. Threatening or accusatory language does. Assume good faith, stick to facts, and give clients an easy way to respond.
When should I write off bad debt instead of continuing to collect?
Most small businesses write off invoices at 90 to 120 days with no response. Before you do, try one more phone call and offer a payment plan. If that doesn't work, see how to write off bad debt for the accounting mechanics.
Can I automate AR follow-ups?
Growthy keeps your AR ledger clean and surfaces overdue invoices in an aging report. For automated follow-up sequences and dunning, use Bill.com, Invoiced, or Versapay. These tools connect to your books and handle the outreach.
Conclusion
A collections process won't eliminate late payments. But it will cut them. Start with clear terms on your next invoice. Set calendar reminders for the +7 and +14 day follow-ups. When something hits 30 days, escalate early. Consistent, professional follow-up works.
Growthy is bookkeeping software, not a CPA firm. This content is educational, not professional advice.
Get started with Growthy
