You’re bound to come across one sooner or later: the customer who doesn’t pay on time — or at all. What should you do when it happens? Here are some strategies to keep in mind.
The most effective way to deal with late-paying customers is to protect yourself from the outset. Run credit checks on all new clients. Sit down with them to discuss prices, fees, and payment requirements before you enter into a business agreement.
Get everything in writing. This should include details of your ownership rights and intellectual property, if any, and all your work orders. If you work on retainer or under contract, clearly state the services you will charge for, the goods or services the customer will receive, and which goods or services will incur additional charges. It makes sense to have an attorney create a general agreement that conveys all of this and is flexible enough to be used with all of your clients.
Let your customers know how often you’ll bill them and for how long they’ll have to make payments. This too should be in writing. Stress to them that it’s not a personal issue. You simply can’t afford to run your business without timely compensation for your work.
Stay on top of accounts receivable. Send out invoices promptly and on a regular basis. Make sure they’re easily distinguishable from the barrage of other mail your clients receive. Many businesses stamp messages like “statement enclosed” on envelopes so they’re not pushed aside or tossed out. Send reminder notices to any client who doesn’t pay within a predetermined time frame (anywhere from 10 to 30 days). These too should be clearly marked.
If a client still doesn’t pay, have your accounts receivable department or a designated employee make a call. Having a third party handle payment issues will make it easier for you to maintain a good working relationship with your clients. The person who does make the call should not chide the client for nonpayment. Have your employee ask if there’s a problem and if there’s anything your company can do to help. If a client is having financial trouble you may want to arrange a more flexible payment schedule.
If these initial steps fail, you might need to use more aggressive means. Just be sure to use methods you’re comfortable with, since they’ll affect your future relationship with the client.
Still can’t recover payment? It’s probably time to hire a collections agency. But before you do contact the Better Business Bureau to be sure there are no complaints against the agency you select.
Have your attorney send a formal letter stating that if you’re not paid in full within a certain time frame, you’ll be forced to take the client to small claims court (the normal claim limit here is between $2,000 and $7,500, depending on the state) or arbitration. If you threaten legal action the client will usually pay up. But if it doesn’t, you may have to follow through with your threat. Before you do, consider the amount you’re owed, how much time it will require to get it, and whether you want to work with this client in the future.
If a client owes significantly more than the small claims process allows, you may want to sue in a formal state trial court. Debt collection cases are usually simple because few actually make it to trial. Most defendants either settle beforehand or fail to show up in court, in which case you receive a default judgment.