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?
The first thing i would identify is the reason for Non Payment...Then bucket them as Voluntary and Involuntary.. Voluntary is wanting to default and Involuntary is default due to financial circumstances, service issue, forgetting to pay, bad accountant who just forgets to process the payment etc etc...The Voluntary bucket either needs to be legally handled incase the money is big or just left as Bad Debt incase the value is not significant enough and following up with that may burn more cash than what you end up gaining..
Involuntary Bucket needs to be handled depending on the reason , such as if the client is having Cash flow problems maybe giving leeway may help both sides and you never know tomorrow when he gets a good business he could be your major client.. Incase of forgetfulness ensure timely automated reminder just before payment dates ..Service issues needs to be handled carefully and would recommend you to give the benefit of doubt to customer..
Attempt to find out why. Sometimes it is because of a financial emergency (illness, lost of job) The person may want to pay but just cant at the amount promised Maybe arrangements can be made with the person. This will get you the money and good PR showing that you are human and can understand and work with people sometimes. Yes you cannot do the arrangements with all but some is better than none.
I think it's important to clearly set the amount (of money), frequency, method of payment and what happens if the partner doesn't pay (sanctions) from the very beginning (even if it is unpleasant), all IN WRITING.
From my experience, people who don't intend to pay don't come back.
If they sign the contract and don't pay, stop delivery of goods/services until they pay and/or you can try a mediation and re-contracting (in this case you may want to ask the lawyer to accompany you). And yes, I agree with Richard (even it is not always possible): "Before accepting Orders request reference from other suppliers".
It is always advisable to have an active A/R process that requires regular monitoring and follow up. That applies to 1 customer or 1000. A customer that does not pay is not really a customer. That is "pro-bono" or "charity" work. One that pays late on a regular basis, but pays, should be considered for a "premium" if your business can sustain such.
One of the more difficult decisions to make is when you may have to consider "firing" a customer. Is the client really worth the effort? If you provide critical services, have the customer pay old invoices before offering new services, or at least request COD until old balances are cleared up.
Small claims is a very effective, yet relatively inexpensive legal route, but does have limits as to how many can be filed annually.
And as stated by Richard Stern, a little up front work in a credit review of the customers payment habits before bringing them on will be well worth the money
Always difficult but a Credit card is good. Sometimes understanding their system helps. Who authorizes the payment? Does it go to an accounts dept then get lost. Should you send your invoice to the person you were dealing with and they pass it on for payment? (they can also be your best advocate to get the money) Money up front if you can. Time line payments are good if invoices are large.
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The secret is doing the right work upfront BEFORE you grant them credit. Do they fill out a credit application. In the credit app there should be details that a 5% penalty exists for late payment, and that they agree that the charges can be put on their credit card if they don't pay. And that they are responsible for all collection costs, etc. etc. It is perfectly OK to expect to be paid as per the agreed terms. I would sent statements detailing the new bill with the added late charges, and you would be surprised how fast people call you and ask to have the charges waived. (You can tell then that you will do it this time, and most will pay on time from then on.. If they wont or don't pay, then they are not a good customer and should be treated accordingly, simply ask them t prepay, or at least give you enough to cover your costs. Credit is a privilege, if they cant prove that they deserve it, don't give it to them, its that simple.
First and foremost you must develop a good working relationship with each client based on mutual respect, trust, likability and your competence to perform. Having developed this relationship you need an engagement letter that clearly articulates the legal expectations and ramifications regarding payment and a termination clause. With this information if there is any concern about late payment (30 days after billing for example), make the call and find out the status. In many cases there was a mistake. In other cases your making the call brings this to the attention of the appropriate party. In some cases there may be extenuating circumstances.
In short stay on top of all accounts receivables.
As a landlord for 7 years I never had a payment over 5 days old. I sat down and explained the implications to my tenants one on one when we signed the lease. In one case where the couple was going through a divorce and she was going to pay half the rent and she was leaving up to him to pay the other half of the rent, I explained what I would have to do. That was after the rent check was late two days. I didn't wan to have to file in local county court, have an unlawful detainer on both of them that would follow their credit score for the next 7 years. I explained this to her and indicated I would do that within two days if I did not have the other half of the payment The check was received the next day.
As a business owner today, I always make a personal call within 30 days on all normal billing. I have been in my current business for 3 years and have followed up on all late payments and then received payment timely.
The moral of the story is to be proactive and know your client base. I have clients that I have not taken because I was not comfortable with the elements of trust with the potential client. Keep that in mind with the customers that you serve. Be proactive, understanding and empathetic. Work with your clients. The bottom line is that you need to be paid to pay your bills too.
Here's a little trick I used, for late or nonpaying clients. Increase your billing rate to encompass a 7% differential. Then offer those clients a 7% discount for on time payments, or a 3% discount if 5 day late. If more than 5 days bill them your late payment penalty. If they believe you are trying to help them they will usually respond. But for those who just will not pay, I have cut them loose and turned their bill to a collection agency. If it comes to a law suit, your attempts to encourage their proper payments will go very well for you in court.
I dont disagree with anything said here. You seem to be a non traditional company with non traditional products, so do I assume you have non traditional customers. There is no obligation to offer terms to your clients (not sure of the $$$ size of a normal order), especially it you do not have repeat customers why take it on.
If a client cant give you some security with a letter of credit then you need to be paid in advance. People pay in advance for products to be manufactored and to be shipped from overseas otherwise the order is not accepted. You may lose a few orders but probably not from people who were going to pay.
I am not sure what type of business you run but this may happen to any business. Nothing is free. People attach value only to something that they pay for. I would include one extra condition in small prints to pay in advance. This is not only to avoid lawsuits, but, also to maintain a positive and a long term relationship with clients.
Rule of thumb never give away your work before full payment. What are you selling a product or services? If, service what kind?
Get your money up front. I won’t talk about my miss spent youth, but it was always the rule growing up and I took that rule with me when I started building businesses. Asking for payment should be part of closing the sale.
If your reputation is good you won't be challenged. If your reputation is NOT good, then work on your reputation.
If you have a recurring service/product, set up recurring payments through Paypal. You will get declined cards even if you set things up this way but it gives you an opportunity to contact your customer before continuing.
Our main company works specifically with small businesses. We have a "Help-not-Hinder" policy. Since so many small businesses fail, we often give (as a one-time offer) our non-paying clients the opportunity to wave their current payment if they've run into a tough spot. There are those who take advantage of us, but many stay on as long term clients after seeing that we are truly on their side.
As far as taking them to court... If you've tried everything "Mike Van Horn" mentioned in his answer, you may want to just let it go. The energy you spend chasing deadbeats (or good people who've simply fallen down) is energy you could be spending to replace them with honorable, paying clients.
Given the required restrictions, avoiding lawsuits etc,
One approach is to demonstrate the effect of late payments on the performance of the contract.
Provide the client a cash flow and programme, indicating the dependence of client payments to allow you to purchase the necessary resources, eg, materials, labour, subcontractors, showing the slippage that can occur if you do not have the necessary funds,
Another option is to request interest on late payments , if the contract allows this.
I have been there! To get paid be persistent. I have found getting in touch with accounts payable department sometimes helps in some companies. They usually know what is going on and may give you some valuable information. Do your best to speak to someone in the company who will go to bat for you. An inside person helps. If it is an individual or small business just keep calling and emailing. Be tough and take no excuses.
Here's the best piece of advice to avoid this situation GET A RETAINER! work off that money then ask for more for the next bit of work. This is especially necessary when dealing with small clients. Have a signed agreement and get paid first!
What I could understand from your profile is that you sell bamboo products. Since you haven't mentioned about your line of business, I am constrained to think from a generic point of view. I believe the best way to charge your clients (and I assume you're in the services), is to typically charge 50% upfront, 25% during the project and 25% at the end. That will help you manage the cashflows.
Having said that, if you can provide me with the following details, I'll be better able to help you with the problem:
1. What do you offer to your clients and who are they?
2. How do you currently charge them?
3. Is there a problem that you face in charging them upfront?
4. What is the deficit that you think you face as a percentage of your customer lifetime value (CLV), that is the value you realize from every customer on an average, at least. However, don't confuse it with ARPU (or average revenue per user), as illustrated here, http://blog.custora.com/2012/01/clv-in-retail-how-arpu-can-lead-to-a-120-error-in-clv/.
Depending on the line of business and stage of the venture you're in, the right advice would vary. It's best if you offer insights on the above mentioned parameters.
Always hold something back until you receive full payment. Always have some leverage you can use that compels them to pay versus going through the legal process.
What I have done in the past in an attempt to avoid those situations is to provide terms of when the payment is due, and provide specific charges that will be applied in the event the payment is late. Once the invoice is delinquent I would call the client and offer to reduce/eliminate the late charges if they paid within a short period of time. Another tactic I have used in companies I have worked for was to refuse help until a payment schedule was agreed to by the accounting department. I was in a service desk environment, so clients were calling for assistance. Delinquent accounts were flagged and when they called for support, I would indicate that I had to transfer them to accounting first. When they agreed to pay past bills, accounting would transfer them back to me. It was very effective. Hope that helps.
In addition to all of the solutions already offered, I just wanted to add the following:
1) Correct Paperwork: For starters, it is good to make sure that your submitted invoice is correct. Sometimes the going back and forth to correct it takes time and can cause delays.
2) Electronic Invoice: whenever feasible, I push to be able to submit electronic invoices instead of mailing hard copies. This way, there is no 'blaming the postman'.
3) Demonstrate Urgency: Not only communicate that it’s urgent for you to get payments, but also demonstrate it by including wire transfer info on the invoice. If they don’t do wires, then offer to pick up the check if you are local. I usually would give the client several dates and times as an option for me to collect the check. In majority of the time, they will pick one of those dates and times. For Out of Towner clients, I will offer FedEx or USP to collect the payment so that they won't have to do anything on their end but print the live check.
4) Relationship, Relationship, Relationship: Create a relationship at every level of the organization. Don't only talk to Accounts Payable when you have a problem. Call them to ask if there is a way you can improve how you communicate your paperwork with them – in other words, how you can make their jobs easier. Take them out to lunch on occasions and/or send something that means something important to your contact. Sometimes, we woo the sales team and management, but ignore those who can help determine whether we fail or succeed after the contract signature.
I hope these tips prove helpful.
There are a few things you can do if not already in practice:
1) Have terms of payment clear on your invoice - i.e. net 30 or 15.
2) State an interest charge that will be applied to the invoice if not paid on time.
3) If a company is late, send out a new invoice with the penalty applied. This will show that you mean business.
4) Collect a small percentage of the total project up-front - i.e. 20%
5) Have automatic payment where you collect a credit card number and charge on the date the invoice is due.
The most important part is to ensure you have a signed contract for any work you do. This way, collecting outstanding debt will be alot easier should you be forced to take legal action.