How to Deal With Unpaid Invoices: 7 Steps Before the Account Becomes a Collection

Most unpaid invoices were lost at the moment of sale, in terms nobody read closely, and the collection effort that follows is an attempt to recover in the third month what the paperwork surrendered in the first week. A business that is owed money has more instruments available to it than an irritated telephone call, though fewer than it imagines, and several of them work only if they were in place before the work began.

The seven steps below run in order, from the contract to the deduction. How to deal with late invoice payments is, for the most part, a question of which of them the business prepared for.

1. The Terms Written Before the Work Decide What a Late Invoice Can Demand

An invoice is a request. The contract behind it is the authority, and a late fee, an interest charge, or a promise to pay the cost of collection belongs in that contract, accepted before the first hour was billed, rather than added in red ink on the fourth reminder.

The terms worth writing down are few: the price, a calendar due date, what happens to the balance after it, and who bears the cost of collecting it. A customer who agreed to those terms in advance has little room to argue about them later. A customer who first sees them on a past due notice (and sellers who insist the customer knew their terms tend to discover how little that sentence proves in a courtroom) has a great deal of room, and a competent lawyer on the other side will occupy all of it.

Whatever the business intends to charge on a late balance should be agreed while the customer still wants the work. That is the last moment the business holds the stronger hand.

2. The First Reminder Belongs to the Morning After the Due Date

A reminder sent the day after the due date is clerical. The same reminder sent sixty days later reads the way a fire marshal's second visit reads to a restaurant owner: the words are identical to the first, and nobody hears them that way.

After a second missed date, the better instrument is a statement of account, which lists every open invoice by number and date, every payment and credit applied, and one balance at the bottom. It also becomes the exhibit.

3. A Freelancer in New York Collects Under a Statute Written for Freelancers

Since August 28, 2024, New York State has had a freelance payment law of its own, placed in Article 44-A of the General Business Law rather than the Labor Law. It protects a freelance worker, which section 1410 defines as a natural person, or an organization composed of no more than one natural person, retained as an independent contractor for services worth at least $800, counting other contracts with the same hiring party over the preceding 120 days. Lawyers, sales representatives, licensed medical professionals, construction contractors and government hiring parties are carved out.

For the one person business that qualifies, the rules are unusually concrete. Section 1412 requires a written contract naming the parties, the itemized services and their value, the rate, and the payment date. Section 1411 requires payment on the date the contract sets or, where it sets none, no later than thirty days after the services are complete, and it bars the hiring party, once work has begun, from demanding that the freelancer accept less as the price of timely payment. Section 1414 allows double damages and reasonable attorneys' fees for payment violations, with a separate statutory award of $250 for the missing written contract.

A studio with three designers on payroll is not a freelance worker under that definition, whatever its letterhead says, and quoting the statute in its demand letter invites a correction.

4. On a Private Construction Project of $150,000 or More, the Statute Sets the Owner's Clock

Contractors on larger private jobs in New York have a prompt payment law in General Business Law section 756-a, and its trigger is the size of the project, not the size of the invoice. It reaches construction contracts where the aggregate cost of the project equals or exceeds $150,000, and it excludes public work, one, two and three family dwellings, and certain other residential projects defined in section 756.

Within its reach, the owner must approve or disapprove an invoice within twelve business days of receiving it and must pay an approved invoice no later than thirty days after approval. A contractor that receives good funds pays its subcontractors within seven days. Late payment carries interest at one percent per month under section 756-b.

A contractor who waits out a silent owner is forgiving that interest one day at a time.

Mechanic's lien deadlines run on a separate track and belong with a construction lawyer.

5. Factoring Buys Time by Selling the Customer's Promise to Someone Else

When an unpaid invoice threatens payroll, the business can sell the receivable. A factor advances cash against the invoice and collects from the customer itself, and the arrangement carries a consequence owners tend to learn afterward: the customer's obligation now runs to a stranger.

The rule sits in section 9-406 of the Uniform Commercial Code. Until the customer receives an authenticated notice that the account has been assigned and that payment is to be made to the assignee, it may discharge its debt by paying the original seller. After that notice, it may discharge only by paying the assignee.

The effect on a relationship is harder to price than the discount, because a customer of six years receives a letter from a finance company directing its payables elsewhere, and whatever the letter says, the customer hears that the seller is short of cash (sometimes correctly, and sometimes out of simple suspicion at a change in bookkeeping it was never warned about, which in a long relationship amounts to much the same injury). The notice is lawful. It is also a disclosure.

Factoring agreements differ on whether the seller must repurchase an invoice the customer never pays, and that recourse term deserves more attention than the advance rate.

6. Commercial Claims Part Is the Forum Built for a Business Owed Less Than $10,000

A corporation, partnership, or association cannot bring a small claim in New York City's Civil Court. Section 1809 of the Civil Court Act bars it, and the legislature built a parallel door beside the one it closed. Under section 1801-A of the New York City Civil Court Act, a business whose principal office is in New York State may bring a commercial claim for money only, up to the same $10,000 cap that governs small claims in the city, exclusive of interest and costs, against a defendant who resides, keeps an office for business, or is regularly employed in the city.

The filing fee under section 1803-A is twenty five dollars plus the cost of mailings. The claimant must certify that it brought no more than five such actions that calendar month. Where the claim arises from a consumer transaction, the business must also certify that it mailed a demand letter no less than ten days and no more than 180 days before filing.

Consider a hypothetical landscaping company owed $7,400 by a restaurant in Queens, the balance six months old and three reminders unanswered. Its alternatives are a collection agency paid from whatever it recovers, a full civil action with the expense a lawyer brings, or a $25 filing and a hearing before the court. The arithmetic makes the choice.

A demand letter comes first even where the statute does not require one, with the statement of account from the second step attached.

Courts outside the city operate under their own court acts with lower limits.

A judgment is not money. It is permission to pursue money, and a customer who ignored three reminders may ignore a judgment as well. That belongs in the decision before the $25 is spent.

7. A Write Off Reaches Only Income the Business Already Reported

The last step is tax. Under Tax Topic 453 on bad debt deductions, a business bad debt is deductible when the amount was included in income. A business on the cash method never reported the unpaid invoice as income, so it has nothing to deduct; the loss already sits in the revenue it never recorded.

An accrual method business did report it and may deduct the debt in the year it becomes worthless, provided it can show reasonable steps to collect. The statement of account, the demand letter, the commercial claims filing: each one is evidence for that return.

When the Gap Was Filled With an Advance

Late receivables and merchant cash advances tend to arrive at the same business in that order. A customer pays in ninety days instead of thirty, payroll does not wait, and an advance repaid by daily debits covers the gap until the debits outrun the customers.

That second question is the one Delancey Street works on. It is a business debt settlement company focused on merchant cash advance obligations, and it is not a law firm: it gives no legal advice, brings no collection suits, and refers matters that need a lawyer to independently licensed counsel. Its initial review of the contracts and bank activity costs nothing and stays confidential, and no funder is obliged to accept a settlement. Receivables and payables are the same ledger read from opposite ends, and a business seldom has trouble with only one of them.