What's the best way to deal with non-paying or late-paying clients?
I've recently had to deal with clients who pay extremely late or simply avoid paying us entirely. I'd like to try to avoid lawsuits, and I'd also like to maintain as positive a relationship as possible with my clients. What can I do to prevent late payments, and how can I deal with non-paying clients (before I resort to suing them)? What has worked for you, and what do you recommend?
I'm going to assume you've already set up payment parameters. I like the suggestions of payment upon receipt with a service fee for 1-15 days and a larger fee for anything after. At this point, you are probably at the point of pulling your hair out with either chronically late payers, businesses with cash flow problems, or someone (call me cynical) taking advantage of you.
For these already in motion, consider making sure you have excellent merchant services rates (make sure you have the right designation and that you are on a low interchange plus pricing model) and offer to let them pay with a credit card to catch up. Most companies will take you up on it.
If they truly are having issues, then write a simple contract (I can send you a sample) that asks for X payments of $ for Y months to fulfill their obligation. Have a merchant services portal that can handle setting up monthly payments. (Some are better than others.) Make sure they sign an agreement to pay so they can't come back on you. Include the invoice when charging. It's worth the % to get them to pay up. It may cost you over 3% if they use a high-end rewards card or an AMEX. But you are paid. It's a small hit to take to save a relationship and have the money in hand.
Though in 11 states, you can't charge a fee for using a credit card. You can charge a "convenience fee." If these are repeat B2B clients, you may want to think about ACH (payment via checking accounts). Again, have them sign a payment contract.
In the future, always get a cc on file and have them sign an agreement that any accounts with balances older than X, will be charged to the account. They may try to do a charge-back if they forget they signed it. So have the contract and the invoice handy for your processor. This is generally only going to be an issue if they are trying to get out of paying and never intended to pay in the first place.
All else fails, depending on the amount, small claims court may be necessary. I understand you want to maintain a positive relationship and it's important to verbalize that. However, seem entirely uninterested in maintaining that relationship. Cut off all future shipments until payment is made. Remember, losing an account that is costing you money is actually making you money in the end.
I'm sure you are aware of the saying "you will never know the person you are with until you marry her/him".
The same is true in business. Just like marriages, business engagements are all about relationships. The only difference is that during the courtship of my-then girlfriend and now-wife, I didn't do any "due diligence" work. I do know of people who did and personally, found it appalling.
I'm in the BPO business and our clients are international. Because of the potential differences in cultural, behavioral and social norms, we do massive and extensive due diligence on prospective clients. And these prospective clients do the same on us and I welcome it. In fact, I encourage it.
In business, you absolutely have to consider the personal relationship with the professional relationship because the company is an extension of WHO the person is. If he/she is an employee then we can assume that given such position, he/she must be aligned with the company's values, purpose and vision.
By establishing the personal and professional relationship, you can determine whether the arrangement is "right-fit".
That said, even if you do find right-fit relationships, it doesn't mean it will be perfect. In truth, there is no such thing as a perfect relationship simply because the business environment as do personalities, change over time.
So when a client is delayed or remiss in paying you, you have to go back to WHY you were in this arrangement in the first place. And the answer to the WHY can be found in the root of ALL relationships: The WHO. As in, "WHO is my client?"
I will advise you to go through this process:
1. ) Request for a call or meeting with your client to discuss the situation. If online, make sure you can record the conversation.
2. ) During the meeting, since you are the "aggrieved party" play the role of the listener. Keep an open mind. I assume you've gone back to the "Why" and re-discovered the "Who" in your arrangement.
3. ) Once the issues have been laid out, arrive at a mutually agreeable resolution that works on a win-win platform. In consideration of your client's situation, you have to be able to elucidate your position and why you can only accommodate to a specific extent. The meeting has to end with both parties arriving at the same position.
4. ) Send your client an e-mail covering the minutes of your meeting and have him/her sign an addendum to your Service Level Agreement detailing the arrangement.
Very important: Just as you should not threaten your spouse with divorce or separation over an argument, you should NEVER bring up the Service Level Agreement (SLA) and its specific provisions on late payment with your client! The objective of the meeting is resolution NOT adjudication.
By attaching the new arrangement to the SLA it becomes a subtle, gentle reminder on the provision without blowing it out of proportion. Trust me, you would not want to add to the stress.
5. ) Keep in touch with your client more often than usual just to check how business is doing. If good, then wish him/her well and move on. If bad, get some feedback, but don't dwell. He/she may be setting you up for a potential default in obligation.
If the client still fails to make payment despite the arrangement, then you could:
A.) Suspend servicing the account until such time default has been updated.
B. ) Terminate the arrangement depending on the gravity of the circumstance.
The decision will depend on the new issues raised during the discussion. There are other corollaries that could be incorporated such as :
a. Weekly payments/installments
b. Interest/cost of money charges
c. Your client can put up an Escrow account in your favor with his/her bank in case of continued default
d. Establish payment via credit card or PayPal whereby in effect, the client's cash flow is not compromised but he gets penalized through interest charges.
Again, the objective is RESOLUTION.
One of the best advice I read was from business strategist Don Peppers. He said that never assume people have malicious intent from the get-go. You still have to be truthful to yourself and hold-on to the non-negotiable core values that have made you who you are. Never compromise them even if your partner/client/associate has put you in an otherwise, compromising situation.
In the end, if it will all come back to WHO your client is. If after these discussions and accommodations, the arrangement continues to be an inconvenience for you, then the client probably is not right-fit for you and the ONLY recourse is to terminate the contract.
Set up a merchant account or Paypal account, so that they pay when the service is performed.
If you must invoice, then specify your terms in writing. If it is "net 30" then if they haven't paid by day 31, give them a reminder call. "We didn't receive your payment. When can I expect that? Can I get a credit card number to handle that?" The one who asks gets paid. The longer you let it go, the harder it is to get paid.
If they don't pay, have a sequence a steps to take.
- Have somebody else besides yourself call.
- Send a letter.
- Send an attorney letter.
- For an ongoing customer, say, "We will be glad to continue our work for you when we receive a payment."
- Take them to small claims court. Getting a summons to court shakes many old payments loose.
"Maintaining a positive relationship" with somebody who is purposefully withholding money they owe you should not deter you from taking forceful steps.
On the other hand, if they don't have any money, or you can see you're not likely to get paid, and it's not a huge sum, then let it go. Don't make your life about this issue.
But don't do business with them again.
1. Have rigorous credit approval process for every new client. No exceptions. If they refuse to complete your credit process, they will probably be a problem in the future.
2. Always use signed service agreements that deal payment terms, interest, penalties, etc.
3. Invoice frequently, on time and accurately.
4. Use statements to summarize outstanding accounts. Clients make administrative oversights and sometimes miss an invoice. The older the problem is, the bigger the problem is.
5. Send overdue notices as soon as invoices are overdue.
6. Pick up the phone and call people. Call accounts payable. The person who you deal with in a department might be known for losing invoices on their desk.
7. Always include copies of invoices, in every email follow-up. Most people pay late because they are disorganized. Did I mention to pick up the phone. Ask for specific promises.
Collecting from someone who has no intention of paying is all about documentation for some claims court. Everything else is about making it administratively easy for disorganized and irresponsible people to get it taken care of.
Business Leadership Corp.
This is one of the tough situations in business to maintain a positive relation with a customer/client but also receive payment for services provided. For late paying clients I have found that a late payment penalty is a good motivator. Another thing to check with the client and see if they have specific cut off dates for their payment cycles - you may be falling into period where you roll into the next payment cycle. One thing that has helped is to have clients on electronic billing and payment transfer. They tend to pay quicker.
You can also address up front with the client and assign payments to milestones in the project - if you are providing consulting services. A payment is required at each milestone gate and then you proceed to the next phase after payment is received. This helps motivate the client so that they get their end product.
Another way to approach the client is to ask them if there is an issue with the invoice - I would work with the person who is your direct contact in the company. If they do not assist then make contact with the person in charge of finance and as a last resort contact the president of the company. The key here is to allow each person you contact time to investigate and assist you.
Best of luck with your clients paying you. Make sure that you have terms and conditions for payment and ensure that they agree to those terms. You do not want to assume they will pay you in 15 days when they have a 30 or 45 day billing cycle.
To prevent payment defaults, steps must be taken BEFORE extending credit by setting up a considerable number of credit controls. Here are some suggestions:
• Offer third party financing.
• Use a credit scoring company.
• Tighter payment terms.
• Require personal guarantees.
• File a lien to establish a security interest in the goods sold.
• Obtain credit insurance.
• Require an annual credit reexamination.
Once late payments start, a well-trained collection staff should begin talking to customers. Collection techniques such as dunning letters that progress from polite reminders to more strident demands for payment, on-site visits, attorney letters, payment commitment letters, and credit holds must be implemented. If you cannot afford to have someone on staff do this, look into a collection agency. Keep in mind; payments 60-90 days beyond terms are rarely collectible and most companies write then off.
To repeat, the best way to prevent late payments is to have good credit controls in place BEFORE extending credit. Learn more about have to manage accounts receivable by taking a course on the subject.
Some things that have worked for me:
To avoid this in the future, get payment (or partial payment) in advance.
Only do the amount of work that has been paid for, up front.
Make payments due periodically throughout the service, and do not start the next phase of the delivery until the client is paid-up.
If this is not possible, avoid completing the work until the client is up to date in their payment.
Make sure you create a payment structure that you are comfortable with. This means that if a client ends-up to be a non-paying client, you have only lost 1 payment installment. Make sure that size of that payment installment is something you can handle losing.
This is an unfortunately "problem" for business. I have had two clients that have "stiffed" me - both when I was new and just figuring out how business worked. I had to change all of my project agreements and the way I approach business, but since then I have never had any issues (some lag, but never a problem that got out of hand).
Here are some tips I've learned.
1. Every client must pay a deposit up front for services. The amount is for you to determine. I sell services, so I have them pay X times the hourly rate up front, and then I bill them weekly. If you are selling a product to them, you should expect payment up front first for a set amount of months or purchases - they need to prove that they are worthy, and then you can approve a line of credit later on.
2. Every agreement/contract you have with a client has a section that explains, thoroughly, your late fee rates/policy.
3. Use invoicing that automatically sets up payment reminders so that you are automatically reminding your clients that it's time to pay.
Unfortunately, I've dealt with this a ton of times- especially when first starting out freelancing. I never really sent any type of contract, and relied solely on honesty, and sad to say, there are many projects- I never got a dime for. But it was a great learning lesson. I send out a trial contracting agreement, for about 6 weeks, then come back to it with the client to see if our work relationship is a good fit. I then also reevaluate the hours that I spend on the project- as some can't afford to pay more than 4 hours a week, and that's discussed. Or the work might entail more labor on my end, and my price may need to be adjusted. I also, upfront ask for a certain retainer, I just started doing this, its not very big, but it counts towards their last invoice.
I don't know if your agreements were verbal (which you still have grounds for if you can prove that payment was supposed to be made- maybe that promised in an e-mail, etc). Or if you have a contract, that makes it very simple.
Before resorting to suing, or filing unclaimed funds for work, I would send a certified letter with an invoice, as well as simple letter to pay this amount by this date, otherwise you will have no choice, but to seek legal action. I don't recommend having them sign for it because some clients may reject, and with just a certified letter, you can track if they did receive it.
If this is an ongoing project, as in your not finished, you need to make it clear that you will cease work until they are caught up in payments, or whatever the negotiation was.
After the letter is sent, if the date of payment goes by- it is up to you. File a claim. Start the collection process. But I usually send out invoices for work, for long-term projects, on a certain day, every other week. So they constantly have a reminder of when something is due. Your business may be different. Either way, I always try to give fair warning and nicely ask for it (its how we make a living!), as well as sometimes offering payment increments to resolve it. Usually, the certified letter serves as the wake up call. You will pursue collection options if they do not make any type of payment by whichever date and reach out to try and arrange something with you.
I hope that was helpful! Good luck!
First, take a step back. Not all clients are created equal. If the client is new, have you done your due diligence on their ability to pay? Are you dealing with established corporate clients who have no financial issues or are you dealing with individuals? For the former, I suggest establishing a relationship with accounts payable, ensuring your invoices are submitted timely and that you can pick up the phone and ask for your invoice to be processed.
Stepping back even farther, consider how you bill for your services. Corporate and individual clients are much more likely to pay a balance due than the entire amount. You might negotiate a deal wherein the terms are 1/3 up front, 1/3 midway and 1/3 at the completion of the work.
For small businesses, compassion with teeth makes sense. You need cash flow. So do your smaller clients. Take the time to get to know what's going on. Can you accept a partial payment while they sort through their issues? Is there a potential barter wherein they offer you a service that you need?
We all work with people. People have needs. You don't run a charity, yet you should be charitable to a degree. The lessons mom taught about getting more flies with honey apply to small business as well as large companies. There is a person within that big company who can help accelerate payment.
Now moving forward, examine what, if anything, on your end could have caused the delay. Were the terms clear? Are you sure the client is happy? Slow payment can be a red flag that the client wasn't happy. Beginning the conversation with a discussion about their satisfaction level could yield payment or uncover issues that you can fix and keep the client.
Finally, deadbeats exist. Try to sniff them out before you work. Sometimes lessons are expensive. Ensure you have no legal or fiduciary responsibility to the deadbeat client and if so, knock it out, walk away and chalk it up to experience. If you don't, walk away and chalk it up to experience.
If the sum is significant you can begin collection proceedings. Beware that you don't get a reputation as a litigious company, however.
Picking the right clients, establishing appropriate ground rules and then approaching people as people and letting them know you need the cash flow to operate can go a long way.