7 Proactive Tactics for Avoiding Invoice Disputes

Invoice disputes are a bigger problem than most businesses realize. They can derail your cash flow projections, prevent your business from seizing opportunities, and often result in lost revenue. Plus, a typical accounts receivable team spends more than a quarter of their day handling disputes, according to VersaPay research. These are significant losses, especially considering that most disputes are completely preventable. In this guide, we’ll walk you through common types of invoice issues and best practices for avoiding invoice disputes, so you can put an end to them before they start.

Types of Invoice Issues

Before we discuss tactics for avoiding invoice disputes, it’s important to understand the different ways an invoice can run into problems. These issues fall into several broad categories, each with their own causes and consequences.

Invoice Rejections: When the System Says “No”

An invoice rejection happens when an invoice does not meet predefined criteria in the recipient’s accounting or procurement system. These are usually administrative or technical issues that prevent an invoice from being processed at all. Some common causes of invoice rejections are covered below.

• Mismatch with a Purchase Order: If the invoice amount, product description, or service details do not align with the corresponding purchase order, it may be automatically rejected.
• Incorrect or Missing Information: Something as small as a wrong billing address, missing invoice number, or incorrect tax calculation can cause an invoice to be kicked back.
• Non-Compliance with Customer Requirements: Many companies, especially in industries like healthcare and oilfield services, have strict invoicing protocols. Failing to format an invoice according to their system’s requirements can result in a rejection.

Invoice rejections typically happen before an invoice enters the approval or payment process. While frustrating, they’re easier to fix than disputes because they signal a need for correction rather than implying a disagreement.

Invoice Disputes: When the Customer Disagrees

An invoice dispute happens when a customer questions an invoice’s validity after receiving and processing it for payment. Unlike a rejection, disputes can delay payment for weeks or even months—and if unresolved, they may lead to non-payment. Some common causes of invoice disputes are covered below.

• Quality or Delivery Issues: The customer claims that goods were defective, incomplete, or never received.
• Billing Errors: Three out of five late payments can be attributed to invoicing errors, according to skynova. This typically means the invoice includes incorrect pricing, overcharges, duplicate charges, or unauthorized fees.
• Scope of Work Disagreements: In service-based industries like staffing or construction, disputes often arise when the client believes the work performed does not match the contract or service agreement.
• Payment Terms Conflicts: A customer may argue that the invoice does not meet the agreed-upon payment terms, leading to processing delays.

Payment Delays: Not a Rejection, Not a Dispute, But Still a Problem

Around 55 percent of all B2B invoices are paid late, according to Atradius research. Although not a rejection or dispute, payment delays are worth mentioning as part of the broader scope of invoice issues businesses face. These delays happen when an invoice is approved, but payment is held up due to cash flow issues, internal processing bottlenecks, or a customer stalling for time. In industries like transportation and construction, where businesses operate on thin margins, delayed payments can cause major disruptions.

The Impact of Invoice Disputes on Invoice Factoring

Understanding whether an invoice issue is a rejection, dispute, or delay is critical because each one affects your cash flow differently. If your business uses invoice factoring, these distinctions also determine whether a factoring company will advance funds on an invoice and how much risk they are willing to take.

Invoice Rejections: A Quick Fix, But a Temporary Roadblock

Invoice rejections are administrative errors, meaning they are usually easy to correct. However, they can slow down payment and create unnecessary delays in factoring. A factoring company cannot purchase an invoice that has been rejected since it has not been formally accepted by the customer.

Invoice Disputes: A Major Red Flag for Factoring Companies

Factoring companies will not purchase invoices that are in dispute. This is because disputed invoices carry a high risk of non-payment, and factoring relies on predictable payment cycles. If a customer disputes an invoice after it has been factored, the business may be required to buy back the invoice or replace it with another.

Payment Delays: Manageable with Factoring but Still a Risk

Payment delays are common in industries where customers take longer to process payments, such as healthcare, construction, staffing, and trucking. Factoring companies account for this by assessing a customer’s payment history and financial stability before advancing funds. However, if a client consistently delays payments beyond the industry norm, it could lead to higher factoring fees or a lower advance rate.

7 Best Practices for Avoiding Invoice Disputes

Preventing invoice disputes starts long before an invoice is issued. Next, let’s take a look at some effective strategies to keep your invoicing smooth and predictable.

1. Set Clear Payment Terms and Expectations from the Start

Disputes often arise when there is confusion about payment expectations. Before delivering goods or services, ensure your customer understands the terms.

• Payment Due Date: Specify whether payment is due in 30 days, 60 days, or another agreed-upon timeframe.
• Late Fees and Penalties: Outline any interest charges or penalties for late payments.
• Invoice Submission Requirements: Confirm whether invoices must be submitted through a specific portal or in a particular format.

2. Use Accurate, Detailed Invoices

An invoice should leave no room for misinterpretation. Include all necessary details to ensure smooth processing.

• Full Customer Information: Include the correct billing name, address, and point of contact. Ensure your team has regular training on best practices for data management and perform regular audits of your customer relationship management (CRM) and billing software.
• Breakdown of Charges: List itemized services or products with descriptions, dates, and quantities.
• Purchase Order (PO) Number: Match the invoice to the PO to prevent automatic rejections.

3. Obtain Written Approvals Before Work Begins

A signed contract, work order, or purchase agreement protects your business from scope-of-work disputes.

• Service-Based Agreements: Have customers sign off on the project scope, hourly rates, and deliverables before work begins.
• Product-Based Transactions: Confirm product specifications, quantities, and delivery terms in writing before shipping.

4. Maintain Proof of Delivery and Service Completion

Many disputes stem from customers claiming they never received goods or services. Keeping records of delivery and service completion can eliminate these issues.

• Proof of Goods Delivery: Use signed delivery receipts, shipping confirmations, or tracking numbers.
• Proof of Service Completion: Require sign-off from the customer upon completion or use digital logs to verify work performed.

5. Invoice Promptly and Follow Up Regularly

The longer an invoice sits unpaid, the more likely a customer is to question it. Sending invoices promptly and following up on outstanding payments reduces the risk of disputes.

• Timely Invoicing: Send invoices immediately after goods are delivered or services are completed.
• Proactive Follow-Ups: Check in before the due date to confirm receipt and address any concerns.
• Automated Reminders: Set up invoice reminders to keep payments on track.

6. Communicate Proactively with Customers

Build strong relationships to prevent minor concerns from escalating into full disputes. Encourage open and transparent communication.

• Dedicated Invoice Support: Assign a team member to handle invoicing questions and dispute management.
• Rapid Dispute Resolution: Address customer concerns as soon as they arise to prevent payment delays.
• Customer Interaction Records: Keep detailed notes on past invoicing interactions to monitor client relationships and track recurring issues.

7. Use Technology for Better Invoicing

Many disputes arise due to human error. Automate your invoicing process to eliminate mistakes that can lead to rejections or disputes.

• Automated Invoice Generation: Use software to ensure calculations and formatting are accurate.
• Electronic Approvals: Streamline contract sign-offs before work begins to prevent scope-of-work disputes.
• Customer Portals: Allow clients to view invoices and payment history in real-time to reduce confusion.

Keep Cash Flow Steady with Strong Invoicing and Factoring

Clear, well-structured invoicing helps ensure your business gets paid quickly, so your operations run smoothly. It’s an essential first step if you’re struggling with cash flow challenges or slow-paying clients. However, many businesses face cash flow challenges despite following invoicing best practices. This is common in industries with longer payment cycles, those that experience seasonality, and during periods of rapid growth. In these cases, invoice factoring can help you bridge the cash flow gap by providing instant cash for your unpaid invoices. To explore how it fits into your receivables strategy, request a complimentary rate quote.