What to do when a customer does not pay
Before escalating: the four things that explain most non-payment
Most overdue invoices are not refusals. They are administrative failures, and treating them as refusals damages a relationship that was never actually at risk. Check these before doing anything else, because each has a fix that takes a phone call.
- The invoice never arrived at the right place. It went to your contact rather than to accounts payable, or to an inbox nobody monitors.
- It is missing something their system requires — a purchase order number, a specific reference, a signed delivery note, a correct GSTIN.
- There is an unspoken dispute about the work, and nobody wanted the conversation, so the invoice is simply sitting there.
- Their payment run is on a cycle you do not know about. Many larger companies pay twice a month; an invoice submitted a day late waits a fortnight.
The single highest-return collections habit is confirming receipt and acceptance within a week of issuing the invoice, while everyone still remembers the work. An invoice you find out was rejected on day sixty has already cost you two months.
The escalation ladder
| When | What you do | How |
| Day 1–7 after issue | Confirm receipt and that nothing is missing | Email to accounts payable, cc your contact |
| Due date | Polite reminder with the invoice attached | Email, factual, no apology |
| Due + 7 | Call your contact and ask for a payment date | Get a specific date, then confirm it in writing |
| Due + 15 | Escalate above your contact | Email to their finance lead; state the amount and the age |
| Due + 30 | Stop work and say so, if there is work in progress | Written notice; this is the point of maximum leverage |
| Due + 45 | Formal demand | A letter stating the amount, the interest running, and the next step |
| Due + 60 | Statutory or legal route | MSME Samadhaan if eligible, or a legal notice |
Two things about this ladder matter more than the specific dates. The first is that every step is in writing, because a chronology of dated written requests is what any later route — statutory, legal or a bad-debt claim — needs from you. The second is that stopping work is the step people delay longest and regret most. Continuing to deliver into an unpaid balance converts a collections problem into a larger collections problem.
The MSME route, if you qualify
If your business is registered as a micro or small enterprise, the Micro, Small and Medium Enterprises Development Act gives you a statutory position rather than a commercial one. Under Section 15, the buyer must pay within the agreed date, and in any case within 45 days where there is a written agreement, or within 15 days where there is none.
Past that point, Section 16 provides for compound interest at three times the bank rate notified by the Reserve Bank of India, and that interest is not deductible for the buyer. Read the current bank rate off the RBI site rather than relying on a figure quoted in an article, including this one — it moves.
The tax lever, which is usually the effective one
Section 43B(h) of the Income-tax Act allows a buyer to deduct a payment to a micro or small enterprise only in the year the payment is actually made, if it was not paid within the MSMED time limit. In practice that means an unpaid invoice to a registered micro or small supplier increases the buyer’s taxable income for that year. A courteous note pointing this out, sent before the year end, resolves a surprising number of overdue balances that months of reminders did not.
- It applies to micro and small enterprises only. Medium enterprises are outside it.
- It does not apply to traders, per the ministry’s clarification, because trading is outside the MSMED definition of enterprise for this purpose.
- The classification thresholds were revised with effect from 1 April 2025: micro is investment up to Rs 2.5 crore and turnover up to Rs 10 crore; small is investment up to Rs 25 crore and turnover up to Rs 100 crore. Both limits apply together.
- Your Udyam registration number should be on the invoice. A buyer who does not know you are a registered micro or small enterprise has no reason to treat the invoice differently, and you lose the leverage entirely.
Where payment still does not come, MSME Samadhaan is the government facility for filing a delayed-payment application, which goes to the relevant Micro and Small Enterprise Facilitation Council. It is designed to be used without a lawyer.
The legal routes, in rough order of cost
- A lawyer’s demand notice. Inexpensive, and it changes the register of the conversation. A meaningful share of long-overdue balances are paid at this step.
- Summary suit. Where the claim is on a written contract or an invoice and there is no genuine defence, the Code of Civil Procedure provides a summary procedure that is faster than an ordinary suit, because the defendant must obtain leave to defend.
- Insolvency proceedings. There is a route for operational creditors under the Insolvency and Bankruptcy Code, subject to a minimum default threshold. It is a serious step with real cost, and it is not a collections tactic — take advice before starting it.
- Arbitration, if your contract has a clause requiring it. Check the contract before filing anything anywhere else.
Weigh the recovery against the cost and the time in every case. A disputed balance of a few lakh can easily consume more in fees and attention than it returns. That is an argument for escalating early and firmly, not for escalating far.
What it does to your books, your GST and your tax
GST
You have already paid GST on that invoice, at the time of supply, regardless of whether the customer paid you. Non-payment by a customer does not by itself entitle you to reverse it. Where the supply is genuinely cancelled or the value reduced by agreement, the mechanism is a credit note issued within the time limit prescribed under Section 34 — not a unilateral write-off.
Income tax
A trade debt that has been taken into income and is written off as irrecoverable in the books is generally allowable as a bad debt under Section 36(1)(vii), subject to the conditions in Section 36(2). The write-off must be real and recorded, and the debt must have been offered to tax in an earlier or the same year. Take advice on the specific facts rather than writing off to make a ledger look tidier.
The prevention, which is worth more than any of the above
- Advance or milestone payments on anything substantial, especially with a new customer.
- Written terms that state the payment period, and your Udyam number if you have one.
- A credit limit per customer, and a rule that work stops when it is breached.
- Aged receivables reviewed every month, so nothing reaches ninety days unnoticed.
Frequently asked questions
Can I charge interest on a late payment?
If your contract provides for it, yes, as a contractual term. If you are a registered micro or small enterprise, the MSMED Act provides for statutory compound interest at three times the RBI bank rate independently of what the contract says. Whether you enforce it is a commercial decision, but stating that it is running changes the conversation.
Does the MSME 45-day rule apply if my customer is also small?
The obligation under the MSMED Act attaches to the buyer regardless of the buyer’s size. The Section 43B(h) tax consequence attaches to a buyer who computes business income, which covers most commercial buyers.
Should I really stop work over an overdue invoice?
Once an invoice is meaningfully overdue and the customer has stopped giving you dates, yes — and in writing, so there is no ambiguity about why. Delivering further work into an unpaid balance increases the exposure and removes the only leverage you have.
What if the customer disputes the work?
Then it is a dispute, not a collection, and the ladder above is the wrong tool. Get the objection in writing, deal with it on its merits, and settle it explicitly — including with a credit note if a reduction is agreed. An unresolved dispute sitting inside a receivables ledger will not age its way to a resolution.
Where to go next on this site
- Lesson 19: Accounts Receivable and Bad Debts — How the receivable and the write-off are recorded.
- The Month-End Close — The ageing review that catches this at thirty days rather than ninety.
- How to Build a 13-Week Cash Flow Forecast — What a delayed collection does to the specific week it was expected in.
- Profitable But No Cash in the Bank — Receivables are usually the answer.
- Working Capital Calculator — What the receivables position is costing you.
- Accounting Glossary — Bad debt, provision and credit note defined.
Sources
- MSME Samadhaan — The delayed-payment facility and the facilitation councils
- Udyam Registration — Registration and the classification criteria revised from 1 April 2025
- Reserve Bank of India — The current bank rate the statutory interest is a multiple of
- Income Tax Department — Sections 43B(h) and 36(1)(vii) as enacted