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.
For existing client - for late payers or not paying for services offered
Option 1 - to stop any further service offerings (if your contracts covers this part) until they clear all dues/ when payment is made (or paid negotiated part with remaining part to be paid in future with commitment) then to reinstate the work/service offerings
Option 2 - for every new work - before starting the work make an agreement wrt Payment plan like work completion slab based payment plan and at any part they dont pay then stop the work until payment is made
Risk is either way exists as your investment to full fill the services will be in dilemma as what will you do when you have build your team as per client need and he/she stops paying and you need to abort the work as well for client its a pain to run to other vendor when work is being stopped in between.
Option 3 - Advance payment based work - take the work only payment is being made 100% in advance
Option 4 - keep dependency on every delivery of work like dont deliver the source code until full payments are being made. These needs to be part of your contract which ever approach you take.
Yes, it is painful to loose the client, sometime as business relationship continuity, we may need to sacrifice/bear the impact due to some delays. As well to continue the work with risk considering a future business scope (if any you visualize). If this work may not fetch me money, then may be a future awaiting project can cover this lose. This can be analysed based on Customer account future scope holds.
My opinion to take the lawsuit way at the end when there is no way out and the payment recovery is critical for my existence.
Hope this helps.
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.
Personally I prefer a contract describing terms and penalties prior to any transaction. For the first transactions before confident is establish, books examined and reference check, you can also request payment upon delivery then put in place a 2/10 net 30 or 2/30 net 90 depending of your industry and confidence factor for this entity. The discount can bring some client to pay early and some other to benefit from your credit .
Hope this helps,
Many years ago I worked in the collections department for the electric company. I was also responsible for setting up new accounts. Business accounts always had to have a security deposit, if they didn't have 2 years of history with us.
I quickly discovered that the people who didn't put up a fuss about the security deposit were not going to be a problem. Those who didn't have enough money to pay it were the ones I'd be seeing again as overdue accounts.
When I started my business I chose to bill in advance. Nothing is done or shipped unless payment has been received. Again, people who balk at paying in advance, tend to be people I'd be chasing 30 days after the invoice was created.
My policy to bill in advance saved my home as 2 of my biggest, most profitable and longest tenured clients went bankrupt within a few months of each other back in '08 / '09. Each of those clients were in the $500k - $1m annual sales for me. Sure the loss of the clients hurt enormously, however I was not left hanging for unpaid services or products.
We continued to work until their prepayment was used up and with ongoing communication they knew that we'd be stopping as soon as it did. Since they were dealing with all sorts of unhappy vendors at the time, our approach actually made their lives a bit easier.
As a small business person you cannot support non-paying or late-paying customers. Make a policy of pre-payment or payment before "it" leaves your business (whatever "it" is)
BTW, prepayment or payment at the time of sale is more common than you think. I'm thinking hard and there are very few bills I pay in arrears -- both personally and in business -- is paid in advance, at the time of delivery or within 7 days of invoice (mind you that's the way I roll too!)
Lawsuits make the lawyers rich, so if worst comes to worst, I'd give it to a collection agency. Good luck!
Request that payments be made in advance of work provided. That sets the tone. If select clients are consistently tardy (behind the typical 15 day or 30 day period from invoice submission date), you're well advised to fire those clients.
Aside..sending a reminder and cc'ing accounts payable representative at the client, along with cc'ing designated CFO or COO, as well as the account rep you work with and including a friendly "Per the engagement agreement executed by your firm, it is understood that payment for services is to be within no more than 30 days. Regrettably, we have been subject to ongoing delays re invoices and in order for us to continue representing your interests, we must respectfully insist on payment within no more than 3 business days. If there is a problem that we are unaware of, please call to discuss.."
also..phoning instead of corresponding often is more successful.
if you've only recently had to deal with clients that pay late, then you've been pretty lucky. Clients/Customers pay late everywhere and all the time; which is essentially why company's have collection departments.
To you're question though
The absolute best way to prevent customers from paying late is not to extend credit in the first place. You'd be amazed by how many company's do not extend credit but rather operate on a cash and credit card basis. Unless you are dealing with larger reoccurring transactions, such as the case with an importer, wholesaler, or manufacturer, this is the best way to operate. Most all retail is done this way.
If by chance you are an importer and are handling larger transactions and credit is the only way then honestly there isn't any way to totally prevent this, but rather only means to control it.
The first and best rule is decide first how much credit you can afford to extend to someone. Base this on whatever due diligence you do on a new customer. Once you've decided, stick to that limit, and don't let the excitement of additional orders push you to extend more that that. Collect on the existing ones first. Don't be afraid to upset a customer by controlling credit. The good ones understand, and you weed out the bad ones.
The next best rule is to teach you're clients to pay on time by being aggressive in you're collections from the start. By aggressive I don't mean pushy or obnoxious, I mean active and consistent. Send out statements the 1st of every month and remind them.
The third is to use "stop ship". This means if someone is late on their payments don't be afraid to cease service until they pay the bill. I always recommend you notify someone that is about to have their service curtailed. Everyone hates learning their service was stopped without be notified. Don't make that mistake.
Some other things you can do
Offer a discount for prompt pay. If you can justify 3-4% for quick pay it can make the difference. 1 & 2% don't make the big impact as they used to.
Give prompt payers a reward after they have proven themselves. Some get extra discounts, lower price, or special deals once in a while...but be sure to remind them its because of their payment record.
And lastly, don't feel funny thanking the prompt pay business owner. It goes a long way to reinforce the behavior.
Bottom line, most people will let payment slip if you let it happen. If you must extend credit, don't assume it will come. Collection is simply part of the business process, comes with territory. Its up to you to reinforce payment behavior and collect.
Oh, and you are absolutely right, collecting in lawsuits is almost a waste of time (except small claims). Don't even think about it as a good way. Unless you debt approaches the six figures, its often not worth the attorneys fees.
Maintaining an open line of communication is critical. The first thing you want to do is find out why your client isn't paying you. Are they not getting paid in a timely fashion from their clients, so cash flow is the issue? Are they struggling financially and bit off more than they could chew? Do they not pay the bill so they don't really have any ability to get you paid more quickly? If it's the third answer you want to find out who pays the bill and the time frame in which vendors get paid.
If the answer is the first or second option then you have a couple of choices. You can add a penalty for late pays. You can write a letter and copy your lawyer at the bottom, or you can have a lawyer draft the letter for you. Most business owners don't intentionally mean to not pay their bills, but when you're running a small company cash flow is usually an issue, and what we forget is that when we don't pay our bills, it hurts other small business owners.
I know this doesn't help with slow payers now but in the future, make it easy for clients to pay by accepting credit cards, if you don't already. And, in the future, don't be afraid to pay a deposit. Finally, if you deliver your products, ask for payment at time of delivery. And, if it's hard for you to ask for money, consider getting someone else to do it. Outsourcing the jobs you struggle with doing can be your greatest business success tool. Sorry, you're going through this,
Non-payment buy your customers can kill your cash-flow, which will ultimately kill your business. I’ll address some steps you should try to collect from your late payer then make some suggestions as how to avoid this in the future.
You don’t mention whether payment is late for merchandise or services rendered, or what type of business it is, so I’ll try to give general guidelines. In this economy, it may not be a malicious attempt to withhold funds. Regardless, you want to be paid.
First, let’s try to collect the outstanding debt. Communication and Customer Service are the keys. Contact the customer to determine if he made a payment that you just didn’t receive. If that’s not the case, ask if there is an issue with the merchandise or service he received. If no issue exists, ask if you can work with him to begin payments. If a late fee was imposed, offer to waive it if payment is made in the next 3-5 days.
This is where your Customer Service skills come in. You may have to swallow your pride and tweak policy, but your goal is to get paid. REMEMBER THAT while negotiating payment. Even offer to accept payment via credit card or PayPal.
If contact by phone is not possible, try email or text messaging. If sending late notices by snail-mail, send it in a distinctive envelope so it doesn’t get tossed with junk mail.
To avoid similar situations in the future, have a clear policy for accepting payment after delivery of goods and/or services.
If the customer is making a large purchase (which is relative), consider running a credit check or ask for references from other vendors. Again, for large purchases, always get a deposit until the customer establishes a great credit history with you. If he’s got poor credit, then ask for payment up front. Losing the sale may not be as bad as losing your shirt.
For most customers, offering “terms” is a win/win scenario. You get paid quickly and he saves 2%. Typically, 2/10 Net 30 is the standard. If he pays within 10 days, he gets a 2% discount, otherwise he must pay within 30 days. On the 31st day, his outstanding bill starts accruing interest and/or late fees. Make sure all terms are clearly stated and understood.
Offer a multitude of payment options including credit cards and PayPal.
Have an internal policy in place that states after a predetermined period, say 90 days late, the account goes into collection. You’ll lose some money, but you’ll sleep better. Unless your company is large enough to have a Collection Dept., you need to concentrate on your core business, not chasing late payers.
Good luck in your quest to get paid. If you need help drafting a policy, please let us know.
Kevin E McCormack
NivekTek Business Services
Colette. The best way is to lay out the payment terms from the start. I'm not suggesting that you haven't done this but when you are nervous of alienating a client, it's easy to let them slip. Once you've established the "pain" of why the client needs your services, explain the terms in detail. Even suggest a deposit payment and keep any further terms short, 7 days for example, until you establish a longer, more permanent and fully trusting relationship. Also, research "conflict resolution", so you don't endanger the relationship in the longer term and your payment, full stop, in the shorter term. If you provide a good service, they will pay.
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.