Late or non-paying clients can seriously impact the cash flow of a small business owner. In the current economy they can even make the difference between whether you business stays afloat or goes under.
There are several ways to manage potential non-payment at the start of a client engagement, including contract agreements with clear payment terms. Other methods include payment incentives such as tying interest rates to late payment (although be sure to educate yourself on state usury laws that limit the amount of interest you can charge).
But no matter how much attention you pay to accounts receivable, at some point most small business owners will encounter a late or non-paying customer.
Here are some methodical ways of dealing with these “special” cases that won’t strain your hard-earned client relationships.
* Re-bill overdue bills immediately – As soon as your first bill is past due, re-bill promptly as a gentle reminder. Alternatively send a monthly statement with the amount-owed clearly labeled as past due.
* Know the book keeper and maintain a cordial tone – If a payment is past-due, make a point of seeking out and ask to be connected to Accounts Payable (call the client front desk or operator). Check whether the invoice was received and if you can help in any way. All the while maintain a steady and friendly relationship. Don’t hang up until you get a verbal agreement confirming when the payment will be made. Follow-up over e-mail confirming the conversation and maintain a paper trail.
* Never apologize –Stick to your guns and never apologize for chasing payment or even consider bargaining. No matter how much empathy you feel for a client who is struggling financially or otherwise.
If your cordial approach has failed and the invoice runs past due more than 60 days, you might want to consider offering a payment plan. Alternate options include working with an attorney to issue a demand payment letter or filing with a small claims court. The latter is a cheaper option since a lawyer need not be involved.
If your client shows signs of going bankrupt, consult an attorney and always file a proof of claim. Warning signs that bankruptcy might be on the cards for your client can include slow payment, lack of communication, adverse industry conditions, etc. Here are some more bankruptcy basics.
Each of these tactics will likely cause irreparable damage to your business relationship, so consider whether the client is significant enough to keep before moving forward.
When all else fails
If you are willing to share a percentage of the unpaid debt, your last option is to hire a collection agency. Before doing so, make sure that the agency is licensed and bonded. Your state’s collection agency administrator can provide information on licensing requirements. In addition, make sure the agency operates under the Fair Debt Collection Practices Act, and check with your state’s consumer protection agency or regional FTC office to see if there have been any grievances filed against the agency.