When customer invoices go unpaid, a small business has more than one way to collect its accounts receivable. You can follow up yourself (by hand or with software), hand the account to a collection agency, or take the claim to small claims court. The three routes differ in cost, in time and in what they do to the customer relationship. This guide helps you measure the problem, compare the routes and prevent the next unpaid invoice. This is not legal advice.
Measure the problem: days sales outstanding (DSO)
Before you choose a route, put a number on the delay. Days sales outstanding (DSO) answers a simple question: on average, how many days pass between a sale on credit and the payment?
The usual formula:
DSO = (accounts receivable ÷ credit sales for the period) × number of days in the period
Then compare the result with your payment terms. If your invoices say net 30 and your DSO comes out well above that, your customers are paying late on average, and the gap is the delay you are financing. DSO does not tell you which customer is the problem; it tells you whether your receivables as a whole are slipping.
Next, pull your accounts receivable aging report: the invoices still open past their due date, oldest first, and the customers who account for an outsized share of the balance. That list, not a hunch, decides between in-house reminders, an agency and the court.
Route 1: automated in-house reminders
You remain the creditor. You write, you text, you negotiate, and you stop as soon as the payment arrives. Automation keeps those follow-up dates from slipping. For when to send each reminder and what to write, see our guide to payment reminder cadence.
Cost: your time, plus the software if you use one. Time frame: typically days to a few weeks, while the customer still reads your messages.
Paymely, for example, is billed monthly in Canadian dollars: the Essentiel plan is $99 a month for 100 active clients, and Entreprise Max is $1,199 a month for 12,000 active clients, with other plans in between. Every plan includes every feature; only the number of active clients changes. Paymely takes no commission on the amounts you collect.
This route is often enough when the invoice is recent, the customer can realistically pay the amount and you want to keep the account. It falls short when the customer has cut off contact, the balance is old, or you can no longer keep up with dozens of accounts by hand without a schedule.
Paymely is not a collection agency: it is software you operate yourself. You import your customers and invoices with a file exported from your accounting software; direct QuickBooks and Sage integrations are planned. Reminders go out by email and SMS on multi-step escalation schedules, with an optional direct payment link: your customer pays you directly, and Paymely never receives the funds. When Paymely's AI detects an Interac payment, the balance is updated; once the invoice is paid in full, the file is marked paid and the reminder sequence stops. Your data is stored on Canadian servers. Learn more about our collections software.
Route 2: a collection agency
A collection agency takes ownership of the debt and contacts the debtor on your behalf, in exchange for a commission or fees. Rates vary from one agency to the next: get the rate in writing, along with what it covers and what you owe if nothing is recovered.
In Quebec, agencies must hold a licence from the Office de la protection du consommateur (OPC): check it before you sign. Unlike software, an agency speaks for you, in a tone and on a schedule you no longer control line by line.
This route often takes a toll on the customer relationship. Handing an account to an agency signals that the ordinary business relationship is over. Sometimes that is exactly what you want (a lost customer, a large balance, total silence). It is the wrong move for an account you still serve every month.
Route 3: a demand letter and small claims court
When reminders have gone nowhere, many small businesses first send a demand letter (formal notice; mise en demeure in Quebec): a dated letter that states the balance, where the debt comes from, a deadline to pay and what you will do next. Keep a copy and proof that you sent it.
Small claims are handled province by province: each province and territory sets its own claim limit, fees and rules on who can file and how. Before you file, read your province's or territory's official small claims website for the current limit and procedure. Plan for preparation time, filing fees and the court's own schedule: this route is measured in weeks or months, not days.
This route makes sense when the balance justifies the work, you have the documents (contract, invoices, reminders, demand letter) and the relationship is no longer at stake. It is overkill for a small, recent balance that a few text messages could settle.
Decision grid
Use the grid as a filter, not an automatic rule. A strategic customer can stay on in-house reminders even with a large balance. A modest, very old balance without supporting documents does not always justify a claim in court.
Criterion | In-house reminders (software) | Collection agency | Small claims |
|---|---|---|---|
Amount | Balances the customer can still pay; invoices from your normal billing cycle | Larger balances, once your reminders have run their course | Within your province's or territory's limit, if your business is allowed to file there (check the official website) |
Age of the debt | Days or a few weeks; the customer still reads your messages | Older debt; silence despite your reminders | Usually after a demand letter and its deadline |
Customer relationship | Worth keeping; you still serve this customer | Already strained or over | Business relationship likely over |
Cost | Your time plus a subscription (Paymely Essentiel: $99 a month for 100 active clients) | A commission or fees (get the rate in writing) | Filing fees plus preparation time; no agency commission |
Prevent rather than collect
The best debt collection is the invoice that never goes overdue. Three levers, before the first reminder:
Clear payment terms. Net 15 or net 30, deposits, interest only if your written terms provide for it, accepted payment methods. The signed quote and the invoice should say the same thing.
A deposit or partial payment. On longer jobs, a deposit when the order is placed reduces the balance at risk. It is not always possible; it is often negotiable with a new customer.
Online payment. A payment link, a clearly identified Interac e-Transfer, fewer “the cheque is in the mail” moments. Paymely puts an optional payment link in your reminders and stops the sequence once the invoice is paid in full.
If you finance consumers rather than invoice businesses, see payment tracking for consumer lenders. To talk about your account volume or ask for a demo, contact Paymely.
Paymely is for registered businesses. To get started, create your account, import your customers by file or manually, then set up your email and SMS reminder sequences. Plans are billed monthly in Canadian dollars, with no long-term commitment; Essentiel is $99 a month for 100 active clients.
FAQ
How do I calculate DSO without getting it wrong?
Take your accounts receivable balance on a given date, divide it by your credit sales for the period, and multiply by the number of days in that period. Use credit sales, not cash sales. Recalculate every month: a single yearly calculation hides the drift.
When does a collection agency make sense?
When your in-house reminders have run their course, the customer no longer answers and the balance justifies a commission or fees. If you still serve this customer, stay with in-house reminders longer. In Quebec, check that the agency holds its OPC licence.
Do I need a demand letter before going to small claims?
Many businesses send one first: it puts the balance, the deadline and your request for payment in writing. What is expected depends on your province or territory and on your case: read the official small claims instructions before you file, and get advice on your documents if the amount warrants it.
Can software replace a collection agency?
No. Software, Paymely included, helps you follow up yourself: schedule, email, SMS, payment link and an automatic stop once the invoice is paid. A collection agency contacts the debtor on your behalf and is paid differently. With Paymely, you remain the creditor and keep control of messages and decisions; it does not act on your behalf. Using it does not guarantee that a customer will pay.
How can I prevent unpaid invoices?
Written terms, a deposit when you can get one, the invoice sent the day the work is delivered, and online payment. The older the debt, the more each of the three routes costs per dollar recovered.