One of the most frustrating situations a business owner can face is a client who won’t pay their invoices. If you’ve already performed a service, delivered a product, or both, you’ll naturally be expecting to receive a timely payment in return. Having unpaid invoices is an unexpected blip in your cash flow, and the flow-on effects can cause a lot of issues for small businesses. 

If you are currently dealing with this problem – or want to know how to handle it in future – we have some tips on how to handle non-paying clients. We’ve referred to guidelines from the Australian government to give you a clear step-by-step process to follow.  

There are countless reasons why a client might refuse to pay an invoice, but whatever the scenario is, you can still follow these key steps to recover your money:

  • Review the terms of your contract
  • Send a payment reminder 
  • Send a demand letter
  • Get help from a lawyer or a debt collection service

To help you through the process, we go into more detail about these steps below, so keep reading for the full details on how to do this. We’ve also rounded up some information from the Australian government on your legal rights if a customer decides not to pay. 

Read on to learn the best strategies for following up on an outstanding invoice.  

Is It Illegal to Not Pay an Invoice in Australia?

This question has a few different answers – specifically, it isn’t a criminal offence not to pay an invoice in Australia. Instead, payment of invoices falls under contract law in Australia, meaning any payment problems can be followed up in court. 

If someone has made an agreement for products or services, it is a legal requirement that they make the proper payment, whether that’s a written or verbal contract (‘handshake deal’). 

However, it isn’t considered theft if someone fails to pay an invoice, and it’s not a problem you can report to the police. You also can’t take anything from the client’s property without a court order, even if payment is outstanding. 

That doesn’t mean you’re out of options, though. There are several payment recovery mechanisms in Australia, and you’re fully entitled to take legal action in every state of Australia. However, most of these cases can be resolved before it reaches the courts. 

If a client still refuses to pay, you can go through the Alternative Disputes Resolution (ADR) or mediation process or take the case to a small claims tribunal. 

For full legal protection, there should always be a clearly stated payment period in a contract or mutual agreement. A client must acknowledge and honour the payment terms stated in the agreement, but if their obligations aren’t clear, it can be much more difficult to enforce them. 

There are extra legal protections that apply to some businesses in Australia, like those in the construction industry. The Security of Payments Act (SOPA) covers those who provide construction services or supply products under a construction contract. These laws act as a fast track to court judgements in the building and construction industries to protect these subcontractors from non-paying clients.

How to Follow Up on an Outstanding Invoice

Clients who refuse to pay can crop up in all industries – and they can give you a hundred reasons why they can’t (or won’t) pay. It could be that they’re unhappy with the service, it wasn’t performed in the time frame they wanted, or they may have made a mistake in their request. 

Refusal to pay is a similar challenge to a customer demanding a refund, only this time, the challenge is that they haven’t paid at all. An unhappy client may choose to withhold payment if they aren’t satisfied with the end result. 

Of course, it doesn’t always reflect on the service you’ve given them – a customer may have run into unexpected financial difficulties. Whatever the reason, though, there are always benefits to handling outstanding payments professionally. 

In fact, you could be breaking the law by chasing up an outstanding invoice too aggressively. Even if the customer is in the wrong, there are legal restrictions on how, when and how often you can contact someone who owes you money. 

Sometimes, the first reminder gets the job done, and an invoice gets paid straight away. The client may have overlooked some details on their bill  (like the due date) and just needed some prompting. You can now heave a sigh of relief!

However, if your client is more stubborn, you will have to follow up with additional collection attempts. Here are the steps to follow if a client hasn’t paid you on time: 

1. Check Contract and Payment Terms

A written contract is going to be your number one ally throughout this collection process. The first step is to go over it carefully. Some of the relevant details can include: 

  • Payment methods you accept (eg. cash, cheque, credit card, online payments, or money order)
  • Terms of credit (if you have provided a line of credit)
  • Interest rate, if any, for late payments
  • Fees for late payments
  • Dispute resolution or complaint procedures 
  • Debt recovery options

These contract terms should be your first point of call if you have a non-paying client. Make sure you understand your customer’s obligations (and whether they’ve breached them) and what you’re contractually obligated to do in return. 

Don’t worry if you only had a verbal agreement with a client: a spoken contract can be legally binding as long as you can present proof of the agreement. Proof of an oral agreement can include text messages, emails, other documents like invoices and receipts, or verbal evidence from a witness. 

However, non-written agreements can be much harder to enforce, so it’s important to put as much in writing as possible. 

It’s also a good idea to make sure your customer actually received the invoice, and the invoice is legally valid. If the customer has moved or there was a typo in their email address, they may not have received the notice to pay.

2. Send a Payment Reminder 

There’s always a chance that a polite and professional reminder will get an invoice paid promptly. It is not uncommon for a client to miss a due date because of a simple oversight. 


A letter, a phone call, an email, or a personal visit (if you can’t otherwise reach them) may clear up any misunderstandings. Your goal is to preserve the business relationship as much as possible, since a peaceful resolution saves you time and money too. 

While it may be uncomfortable to chase after your client’s payment, remember that you also need to stay in business. To help you recover unpaid invoices, there are steps you can take to collect money owed fairly and legally.

Using a pre-written template can save you time and effort in this stressful situation, and the Victorian government has provided some debt recovery templates that can be used for SMS or email. In your reminder, make sure to confirm the missed payment date then negotiate a new payment schedule. 

You can increase your likelihood of getting paid by offering a payment plan to the customer. It may not be what you envisioned for this project, but getting paid in increments is better than not getting paid at all. 

Remember to draft an agreement that outlines the new payment schedule and have it signed by your client. In the meantime, hold off any deliveries and services until the invoice is paid to minimise your losses and incentivise payment. 

The recommended time frame for debt collection would be the following:

  • Two weeks overdue: polite letter of reminder via email or post. Your client may be having genuine personal or financial problems, or the expectations may have been unclear to them. 
  • Two to four weeks overdue: this is the time to contact your client via phone. Maintain the same polite tone while emphasising the exact time and date that the invoice should be paid. Emphasise that you’re relying on their payment to meet your business expenses. 
  • Four to six weeks overdue: At this point, the client has left you with no choice but to be more persistent – within the legal restrictions for contacting a debtor, of course. It’s time to send a final notice, and if this isn’t effective, a formal letter of demand. 

3. Send a Letter of Demand 

If your client still hasn’t paid the invoice at this point, your next step should be a formal letter of demand.. This letter conveys a message that you mean business. It is an opportunity to put into writing all your concerns. The client will also have a chance to remedy the problem before you take any legal action.

You may draft a demand letter yourself using the Victorian government’s recommended template or have a lawyer do it for you. This is the first step towards legal action, and should be titled “Letter of Demand” clearly at the top of the page. 

Generally, the letter of demand contains how much the client owes you, what the payment is for, and the exact date they need to settle the outstanding amount. A letter of demand should warn the recipient that legal action will follow should payment still not be made. 

 

What Not to Do When Following up on an Unpaid Invoice

There are some things you must avoid when attempting to collect overdue invoices, and if not adhered to, your business could be in breach of the law. 

Firstly, you cannot use coercion or physical force in your efforts to collect outstanding payments. You also can’t contact anyone else about the debt, including a customer’s family or employer. 

Additionally, you can’t hassle or harass a client who owes you money – and the limit of what’s legally ‘harassment’ might be different to what you’d assume. It is understandable that you are tired and frustrated at this point, but there are clear ACCC rules on how you can legally contact someone who owes you money

You also can’t deceive or mislead your debtor. An example of this would be pretending to be a law enforcement officer to scare your client into paying. In fact, you should always identify yourself and the reason you’re calling when you make contact. 

Another “don’t” in debt recovery is to take advantage of a disability, vulnerability, or other situation that may be affecting your client. This is considered unconscionable conduct, which, if brought to court, may result in you getting penalised. 

Proceed with care when trying to collect overdue payments, and avoid losing your temper – if you’re struggling, hang up the phone or limit communication to letter or email. Don’t let the tables be turned against you, or you could end up in legal trouble yourself. 

There are still other legal ways to chase up your payment, and if things are getting tough, you should seek situation-specific legal advice on how to deal with the non-paying customer. 

 

What to Do if a Customer Refuses to Pay an Invoice

There are several things you can do when a customer refuses to pay an invoice. Starting legal action can be daunting, but don’t forget that you’ve already provided the product or service – it’s time for the customer to hold up their end of the bargain. 

Ultimately, you shouldn’t have to feel ashamed for trying to collect the money you’ve earned. Of course, a peaceful resolution is better for everyone, but if that’s not possible, there are several legal actions you can take in Australia:

Get Legal Help 

If you have done everything you can collect payment and you are still left empty-handed, it is time to get legal help. Before seeking a legal remedy, you will have to do your research and see if it’s worth taking the customer to court. Weigh the pros and cons of taking the legal route before committing, as it will be a process that costs you time and money. 

If you have decided to pursue legal action, here are the organisations that can help you.

  • Community Legal Centres

These centres can help you draft a letter of demand and assist you in filling out court forms. Their evening advice clinics are also perfect for busy business owners. You can find a legal centre near you through the National Association of Community Legal Centres website.

  • Legal Aid Commissions

If forking out for your own lawyer is not in your budget, then you still have the option to get assistance from Legal Aid. They provide free legal advice and information sessions. They can also help you in preparing letters or assist you in running court cases. You can find a list of legal aid commissions on the Australian government website.

  • Small Claims Tribunals

Small claims tribunals were created to provide simple, fast and legally binding solutions. You don’t need to have a lawyer or deal with lengthy court procedures. The tribunals give legal advice, help arrange summons, fill out forms, and resolve disputes before a magistrate. A list of small claims tribunals can be found on the ACCC’s website.

  • Small Business Commissioners or Ombudsman

These government-appointed advocates for the rights and interests of small businesses provide debt recovery advice. They also offer dispute resolution that is kinder on the budget. You can contact your local Small Business Commissioner or Ombudsman for more details.

  • Local, District & Magistrate’s Courts

When the amount owed is too high for a small claims court, the county, district, or supreme courts will decide on disputes. The procedures in these courts are far more complex and formal, so you will need a lawyer to represent you. Check out the list of courts on the National Judicial College of Australia website.

  • Private Law Firm 

Engaging the services of a lawyer may prove to be more cost-effective if the client owes you a large sum of money. Your lawyer will be able to provide you with the best solutions and court case management strategies that directly suit your needs. 

Engage a Debt Collector 

If your friendly payment reminders go ignored, your next step can be engaging the services of a debt collector. Make sure that you have already sent a demand letter before going to a debt collector.

A debt collection service helps businesses recover money owed to them for a fee. Fees usually range from 5% – 30% of the debt value, but it does take the pressure off chasing up the debt yourself. Engaging the services of a debt collector sends a serious message to your clients that collection efforts will now be handled by professionals. They can also take legal action on your behalf. 

Remember that this will definitely strain your business relationship with the client in the future. However, getting the payment you’ve earned can take priority, so it all depends on your individual circumstances. 

 

 Writing off a Bad Debt 

If you think there’s zero chance of collecting payment, you may be able to write off the invoice as a bad debt. Use this option only as a last resort and after you have exhausted all other avenues. 

There are some strict criteria on what can be considered a bad debt, preventing businesses from claiming all their unpaid invoices as tax deductions. You’ll have to demonstrate the debt really is “uncollectable” and not just “unlikely to be paid”. 

The debt will need to be written off on your books before you can claim it as a tax deduction, and the ATO also clarifies that this will depend on your accounting methods. Either way, you will need the assistance of an accountant who can make sure all the boxes are ticked. 

How to Prevent Unpaid Customer Invoices in Future 

After dealing with the stressful ordeal of a missing payment, you will want to do everything in your power to avoid this situation again. You can prevent unpaid customer invoices by taking a proactive approach.

Some risk mitigation strategies to avoid unpaid invoices include: 

  • Follow invoicing best practices
    A good invoicing system can help protect the cash flow of your business and help you manage your tax obligations. Make sure that your invoices are easy to understand and look professional. Remember, it is your first line of defence in your collection efforts, so you have to do it right off the bat. 
  • Be specific about payment terms
    Payment terms include the date that you expect your clients to pay. If you’re extending a line of credit to clients, ensure the details are all included. Specify your accepted payment methods and any relevant account details, making it as easy as possible for customers to pay. Your debt collection policies would also be a helpful addition to your invoice.  
  • Require an upfront payment
    Some small businesses request a down payment before the start of the project, while some expect payment after each stage of the work. Either way, this strategy ensures that you still get a fraction of your payment should a client fail to pay the final invoice. You have the option not to start working if there is no upfront payment, or stop working if a stage payment is missed – but be sure to cover all those terms and conditions in your contract. 
  • Implement late fees 
    You can also charge late fees for invoices that are left unpaid. Include a structure of late fees in your invoices or contract. Late fees may be applied 10 to 15 days after the invoice is due, and should be clearly outlined in your contract and on the invoice. 

Related Questions

Can I Sue Someone for Not Paying an Invoice?

Yes, you can potentially sue someone for not paying an invoice. However, in most cases, legal proceedings take a long time and can be heavy on the pocket, so try the other steps in the debt recovery process first. You can use this checklist from the Australian government to determine if going to court is the best option for you. 

Can I Charge Interest or Late Fees on Overdue Invoices in Australia?

It is legal in Australia to charge interest or late fees for overdue invoices. However, there are restrictions and requirements that you need to consider to make sure the charge is valid. Ensure that these penalties are fair and reasonable, and clearly stated in the contract’s terms and conditions. 

 

Disclaimer: This article is published in good faith and for general informational purposes only. Jim’s Plus does not make any warranties about the ongoing completeness and reliability of this information. It does not constitute financial or legal advice, and you should always consult a professional advisor on these matters.