Red Flag Indicators of Late Paying (or Non-Paying) Customers - Funding Gates Blog
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Red Flag Indicators of Late Paying (or Non-Paying) Customers


Dean Kaplan, The Kaplan Group

Not getting paid is very painful.  Once an invoice is past due, the chances of collecting decline more than 1% per week according to annual surveys by the Commercial Law League of America. By the time an invoice is 90 days past due, the chance of collecting has already declined to 74% and it drops to 58% at 6 months past due.  These statistics make it clear that you have to recognize problems and take action quickly or your chances of having a write-off increase dramatically.

Some indicators of problems are obvious, such as receiving a check that bounces or being told by your customer that they have cash flow problems and just can’t pay.  But there are many other things you might learn about or experience with your customer that are red flags of a potential problem:

  • Owner getting divorced
  • Severe illness in owner’s family
  • Moving to new location
  • Change in order pattern (up or down)
  • Layoffs
  • Long-term employee no longer there
  • Selling company
  • Raising money or getting a bank loan
  • Can’t pay until their customers pay
  • Major customer filed bankruptcy
  • Can’t find invoice
  • Invoice approval taking longer than a month
  • Owner never there
  • Person who signs checks never able to speak on the phone
  • Business won’t take your calls
  • No response to messages and emails
  • Receiving a partial payment
  • Disputing invoice for spurious reason
  • Broken promises
  • Competitor calls you for credit reference on your customer



Personal problems such as divorce or a serious family illness have serious financial costs that tend to have priority over unpaid invoices.  This is compounded by the fact that the business owner is less focused on the business which can cause lower profits at the company.

Moving to a new location costs money.  If it is smaller, then the company is downsizing.  If it is larger, it’s a positive sign, but growing companies need more working capital.  They may be financing growth by delaying payments to vendors.  It is also risky if the business is undercapitalized. If things don’t go according to plan, a severe cash crunch can develop quickly.

Learning that your customer has laid off employees is an obvious sign of financial distress.  But when a long-term employee suddenly isn’t there, it may also be a sign of problems.  Perhaps they just moved out of town.  But maybe they saw financial problems and decided they had to get a more reliable source for a paycheck and moved on before everything falls apart.

If you hear they may be selling the company, this is a huge bright red flag.  More often than not it is an indication that the company is financially struggling and it is the owner’s last desperate chance to salvage something from the business.  Unfortunately, the sales process is very distracting and time consuming, so the businesses operations suffer even more.  Most deals fall through or the seller gets far less than they were hoping.  And all too often the seller just disappears after a sale and vendors get stiffed.

Similarly, when you hear they are raising money or getting a bank loan, it could be a sign of big problems.  When a company can’t pay its bills on time, it means it is undercapitalized and that makes it much harder to actually get a loan or more investment.

Other flags may not be quite as obvious.  When your customer can’t find the invoice, says it hasn’t been approved, the owner or check signer is not in the office, or makes frivolous disputes, these explanations may simply be excuses because they don’t have money.  When they stop communicating or break promises, something definitely is wrong.


When you see one of these red flags, it is important to take immediate action.  Typically the first action is to learn more.  Get on the phone with your customer.  Talk to different people at your customer to see if they all have the same story or different stories.  Visit their location.  Talk to former employees The goal is learn what is really going on at your customer to determine if there is a serious problem or just a minor aberration.

If you think the problem is serious, you should assume you will NOT get paid unless you take dramatic action.  This will motivate you to give the account the extra attention it is going to need in order to get paid.  Forget that you already provided the product or service.  At this point, it is the effort and skill you put into collecting that is going to determine whether you receive of money or not.  Your chances of collecting are rapidly declining so move quickly and be persistent.  The more serious the problem, the sooner you should escalate to using a competent collection agency.



Dean Kaplan is President of The Kaplan Group, a commercial collection agency and consulting firm.  He has an MBA from the University of Chicago and a 30-year career as a CFO, consultant, entrepreneur, and negotiator.  He has closed over $500 million in M&A transactions while traveling to over 40 countries.


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