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How to Handle Non-Paying Clients

Sammi Caramela
Sammi Caramela

Contracts, lawyers and collections agencies are a few places to turn when you have clients who won't pay their invoices. Even better is to prevent the problem in the first place.

When you do business with a client, you expect to be paid for your labor, product or services. But what happens when those payments are late – or don't come at all? It's a question that comes up often. Fortunately, there are steps you can take to handle and even prevent the problem.

Preventing non-payments

Chasing a non-paying customer is often a messy process, so it's best to avoid the issue altogether by taking the following precautions.

1. Research your client.

If you've never worked with a client before, do your research and find out who you're dealing with. Google their name, ask your contacts if they know anything about your new prospect, run credit checks on them, and, for business clients, see if there are any complaints against them on sites like the Better Business Bureau.

"Most non-payments can be prevented or severely minimized by screening the customers in advance," said Jocelyn Nager, president of legal firm Frank, Frank, Goldstein & Nager. "Thanks to all information available on the internet – especially the court records, notice of liens and more – most often you can run a risk assessment on your own … and the possibility of non-payment should be reflective of your tolerance for risk." 

2. Have a contract.

No matter if the client is your best friend or one of the most respected business leaders in your industry, always have a written contract in place. The contract should address these legal concerns:

  • Payment schedule: e.g., 40% deposit, 40% milestone payment and 20% upon completion
  • Terms: e.g., payment either 30, 60 or 90 days after the invoice is sent
  • Preferred payment method: e.g., checks, credit card or PayPal
  • Scope: the exact work you are expected to complete
  • Deadline: expected completion date
  • Late payment policy: the amount charged if an invoice is not paid on time

It's essential to get all details in writing so you don't face issues down the road. For instance, if your client is aware they owe fees for overdue expenses, they'll be less likely to flake – and if they do, they'll be forced to pay interest. But if you fail to set up a contract, nothing is guaranteed.

"Often when assisting clients who are being charged interest, late fees, or legal fees, I will ask the company for anything in writing and signed by my client that permits them to do so," said Thomas J. Simeone, trial attorney and managing partner at Simeone & Miller LLP. "When they cannot do so, I explain that interest and fees are not part of the contract and therefore are not allowed."

Don't set yourself up for problems that are easy to avoid. You can find service contracts for free and online.

Bottom lineBottom line: Make sure you have a service contract in place before conducting business. You can find free contracts and contract templates online.

3. Ask for a deposit.

If you ask for a portion of the payment upfront, you'll absorb some of the hit. Asking for a deposit or retainer is common for freelancers when they negotiate with clients and will help cover the expenses or time that you already put into a project.

According to Tina Willis, owner of Tina Willis Law, the amount you should ask for depends largely on the industry. If workers in your position do not typically charge retainers, consider installment fees, which are paid as you complete certain parts of the job.

"That way, you are less likely to do way too much work before getting paid, or realizing that you are never going to be paid," Willis said.

4. Offer early payment discounts.

For large invoices, your customers may be more likely to pay in full (and sooner) if you offer discounts for early payment. For example, if you file a $10,000 invoice due 30 days after receipt, then you can offer a 3% discount ($300) if your client pays within 15 days. You can also stagger your early payment discount by taking this discount down to 1% ($100) if paid between 15 and 30 days after invoicing.

5. Allow payment in installments.

If slightly delayed client payments won't drastically interrupt your cash flow, installment-based payment plans can create a middle ground for you and your client. For the $10,000 invoice example, you could offer a payment plan of $5,000 within 30 days and then one $2,500 payment each 60 and 90 days after the invoice, which can maintain your cash flow while easing the client's burden. [Find out how Accounting software can help you manage and track payments.]

6. Charge late fees.

To incentivize timely payments, list the late fees and their effective dates in your invoices. Alternatively, you can send your client a new invoice with added late fees after a certain period of no payment. If you retroactively add late fees, warn your clients first.

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Approaching non-paying clients

Sometimes, no matter what you do to prevent the issue, you're still left empty-handed. If you've taken all of the precautions and a client still hasn't paid the invoice, you'll need to act fast. Here's how to approach the situation.

1. Weigh your options.

Ask yourself if chasing down the client is really worth it. If the payment was only a small percentage of your yearly income, it may be better to let it go and write off the client for future business. You could end up spending more money and energy than the invoice is worth.

"Best-case scenario, if you have a winnable case, and the defendant has the money to pay and doesn't declare bankruptcy, you usually will still have to pay your own attorney's fees to collect," Willis said. "And those can run in the tens or even hundreds of thousands, depending on the complexity of the case."

2. Follow up.

Don't hesitate to send out an email if the client hasn't paid the invoice by the agreed-upon date. There's always a possibility that they lost the invoice or that it somehow never reached them. Maybe the client was on vacation or had a family emergency. You shouldn't instantly assume that the client is a deadbeat because they didn't pay on time.

Send them a friendly yet firm email reminding them that the invoice is past due and you'd like to resolve the issue as soon as possible. Also ask if they have any concerns with the product or service that you provided, or if they need assistance with the payment process.

3. Talk to a lawyer.

When your client is resisting or ignoring your requests, and you still think the unpaid invoice is worth the trouble, you should involve a third party. But don't ask a friend or look online for help; meet with an actual attorney, who will suggest which legal courses of action you can take against the customer.

According to Willis, once you've tried all else, it's best to hire a lawyer to write a demand letter.

"Many businesses and individuals do not understand the legal obstacles involved in collections," she said. "So, if they are a debtor, and your lawyer contacts them, many will just pay without analyzing further."

You also want to be careful not to overstep the Fair Debt Collection Practices Act, added Roumen Todorov, co-founder and COO of 411 Locals. A legal assistant will help you avoid trouble with the applicable laws.

4. Send a letter of intent.

Letters of intent inform a customer who won't pay for your services that you plan to pursue legal action. Your letter could detail your plans to report the unpaid debt to a credit bureau, file a lawsuit or hire a collection agency. Sometimes, this letter will compel your customer to pay for your services before you actually take the steps you've outlined. As long as you don't threaten anyone in these letters, they're perfectly legal.

5. Go to small claims court.

Small claims court offers a low-cost, relatively low-hassle solution when your customer won't pay for services. If the amount you're owed is below your state's small claims maximum, you can sue your client in small claims court without hiring a lawyer. Better yet, if your client fails to show, you'll most likely win the case by default.

6. Enter formal dispute mediation.

In a formal dispute mediation, a paid mediator helps you and your client reach an agreement. However, your client must agree to mediation for this debt collection method to be effective. Often, clients who are already avoiding you will not agree to mediation – but you can still get their attention with one last resort.

7. Hire a collection agency.

You could also hire a collection agency to recoup the debt for you. You can find a reputable collection agency the way you would find other professionals, such as accountants and lawyers. Ask your network if they know of any collection agencies, or read online reviews to select one for yourself. If that doesn't work, check out member listings for the Commercial Collection Agency Association or BBB-certified collection agencies.

"A licensed collection agency is experienced, trained, and skilled to pursue recovery while trying to maintain a good business relation with your debtor, should you want to keep doing business with them," said Federico Nuccio, FCIB Certified International Credit Professional and CEO of Recoupera. "Most agencies will offer you to collect on a contingent fee and on a 'no win, no fee' basis. This way, you can rely on their assistance while not incurring further costs and keep focusing on your business."

Max Freedman contributed to the writing and reporting in this article. Some source interviews were conducted for a previous version of this article.

Image Credit: Castleski/Shutterstock
Sammi Caramela
Sammi Caramela
business.com Contributing Writer
Sammi Caramela has always loved words. When she isn't writing for business.com and Business News Daily, she's writing (and furiously editing) her first novel, reading a YA book with a third cup of coffee, or attending local pop-punk concerts. She is also the content manager for Lightning Media Partners. Check out her short stories in "Night Light: Haunted Tales of Terror," which is sold on Amazon.