Running a business is hard enough without having to deal with deadbeat clients. In a world where 2% of the internet runs on Joomla, there are a lot of freelancers that are billing clients. There is an estimated 53 million people who work from home in the US. Most of them are billing clients and living their lives. I like you have been one of those people for the past 10 years.
In a perfect world, we would send off an invoice, receive prompt payment, and then all get on with our lives. It would be a wonderful life. Unfortunately, this isn't the reality for many SME's (small to medium-sized enterprises). I've been lucky in that the vast majority of my customers and clients have made payments on time, but I know late payments (and non-payments!) are a serious concern for many businesses.
Late payments can be particularly troublesome for smaller, service-based businesses that are dependent on predictable cash flow just to meet their own month-to-month obligations. In fact, according to the latest Visa Small Business Cash Management Survey (pdf), receiving and collecting payments is the top challenge for small business owners when it comes to managing their money. Cash Management Challenges in 2012. Source: Visa small business[/caption] Late payments appear to be an even bigger problem on the other side of the Atlantic. Late commercial payments have been a hot topic in the UK over the past several years, as small businesses are currently owed £32 billion in late payments; to put this in more relevant terms, that means the average small business is currently owed more than £30,000. Given the prevalence and potential impact of late payments for SME's, I wanted to offer some effective strategies for getting paid on time and dealing with deadbeat clients. I've broken the process down into four steps: 1. Preventative measures to reduce your risk 2. Invoicing best practices 3. What to do when a client's payment is late, 4. How to deal with deadbeat clients
"An Ounce of Prevention": 4 Ways To Reduce The Risk of Late Payments
While we certainly can't prevent all late and non-payments, there are ways we can significantly minimize the risk. Here are four of the most effective strategies to make sure your clients pay on time.
1. Have a transparent payment policy in place.
Setting clear expectations from the outset is key to getting paid on time. And one of the best ways to set these expectations is to have a transparent 'no pay, no work' policy. It doesn't have to be anything fancy, just a simple one or two-line blurb in an email, contract, or invoice will often suffice. Better yet, include it in several places to ensure your clients are literally unable to avoid seeing it. Your payment policy can include:
- When payment is due (30 days following invoice issue, 60 days, etc.)
- Interest or late fee charged on overdue payments
- How customers or clients may pay (check, credit card, etc.)
- Discontinuation of services: The date at which services will be discontinued following non-payment
Sample payment policy*: "It is our policy that payment is due within 30 days of the issue of an invoice, unless an alternative schedule has been agreed to in advance. Payments made following the 30-day period will be subject to a 2% late fee; payments still outstanding at 60 days will result in all work being stopped. Please be aware that all payments 90 days overdue will be handed over to our collection agency." *This sample is for informational purposes only.
2. Run credit checks when there's long-term risk
While it may seem like overkill, running a credit check on certain clients may provide some protection against chronic non-payers. Keep in mind that a credit check will only be appropriate and permissible when entering into a long-term business relationship where you'll be extending credit. If you do decide to run a check, your first step will be to ask your client for permission. Credit checking agencies require written permission before performing the service, and your client's reaction to the request could in and of itself be telling: if you sense hesitation or if your client flat-out refuses the credit check, that's a pretty good indication they have something to hide! Running a credit check is relatively inexpensive (between $15-$30 per report), and can give you peace of mind when signing on clients where there will be significant financial risk.
3. Require deposits from new clients
If you'll be taking on a serious financial risk with a new client, consider requiring a 50% deposit or retainer up front. This is particularly important for small service-based businesses who work with one client at a time. As you get to know a client, you can adjust or remove this policy, but it's a good idea to have it in place for all new clients. It's much easier to remove the deposit later than it is to introduce it. Keep in mind that honest and trustworthy clients won't have a problem putting down a deposit; and those clients that do complain about it are probably best to avoid anyway.
4. Consider accepting payment cards
According to the Visa survey I mentioned earlier, 7 out of 10 small businesses who accept payment cards (e.g., debit or credit) say it has improved their cash management process overall. And of these respondents, 39% reported greater efficiency in terms of collecting receivables. While accepting credit cards may cost you in terms of processing fees, the benefit of receiving guaranteed, on-time payments may be worth the expense.
Invoicing: Best Practices For Prompt Payment
Your invoices are the primary way you'll communicate payment information to your customers and clients. How and when you invoice will be the key to receiving on-time payments. Following are four invoicing best practices from Due founder Murray Newlands to give you the best chance of getting paid on time!
- Make sure your invoice doesn't get lost in the shuffle: Using an eye-catching design, particularly for hard-copy invoices, can help set your invoices apart from the pack. It's also critically important to make sure you're sending your invoice exactly where it needs to go; double-check that the email or physical address you're sending it to is correct. I recently spoke with a lawyer who was waiting for an invoice from a mortgage company; meanwhile, the mortgage company was waiting for the lawyer to make payment before the sale could go through. And all the while, the invoice was sitting in the legal assistant's inbox, unnoticed. Had the bank double-checked that the email went to the correct address, the whole situation could have easily been avoided.
- Include a detailed breakdown on each invoice: Your clients want to know exactly what they're paying for. Failing to provide a detailed breakdown of charges can cause unnecessary delays in the payment process. Be sure to specify relevant dates, quantities, and detailed listings of products or services provided.
- Send invoices earlier than you need to: You can't send invoices the day payment is due and expect them to be paid on time. Whenever possible, send invoices earlier than you need to. You don't want to send them too early, but giving your client ample lead-time can help ensure timely payment. If you do your own invoicing, you may want to use an invoicing tool that allows you to schedule the delivery of your invoices ahead of time.
- Offer early bird incentives: If you're able, offering an early payment discount can be attractive to some customers. A typical early payment term might be 2/10, net 30; meaning the client will receive a 2% discount if payment is made within 10 days, or they can choose to wait 30 days and then pay the full amount.
What to Do When Payment Is Late
There will inevitably come a time when a customer or client fails to pay on time. Having a plan in place for how to deal with these clients will help you stick to your guns, and ensure you handle lapses consistently. Here are four steps to dealing with late payments.
1. Follow up via email
It's happened to the best of us: work and life get busy, and you forget to pay a bill. Maybe you accidentally deleted the invoice, or it got lost in the mountain of paperwork on your desk. If a client has a track record of paying on time, extend some grace and send out a polite reminder. A simple email saying, "Just a reminder that payment is now due", may be enough to entice payment from your more conscientious clients.
2. Make a phone inquiry
If payment is seriously overdue and your polite email reminder didn't produce any results, call it in. A phone call is harder to ignore, and is more likely to produce results. Inquire as to a specific date when payment can be expected. A reminder of your late payment policy would also be appropriate here.
3. Send a registered letter
If payment is grossly overdue and an email and phone call haven't produced results, it's time to take action. Send a registered letter with a past due invoice, and require that payment is made within 72 hours. State that the next step is for the account to go to a collection agency or for legal counsel to be brought on board. If you're looking for help with how to effectively word your late-payment notices, here's a great collection of three late payment reminder templates.
The Dreaded Deadbeat Client: What to Do When a Client Just Won't Pay
Sometimes, despite your best efforts, a customer or client just won't pay. It's easy to second guess yourself, wondering what you could have done to prevent it. But the truth is, you are never responsible for a client not paying (unless of course you didn't send an invoice!). If it becomes apparent that a client simply isn't going to pay, it's time for drastic measures.
- Stop all work: If you haven't already halted all client work, now's the time. No further work should be done on their behalf, even if this causes the client to miss important deadlines. At this point, you hold no further responsibility for the work until the bill is paid in full. Work done to this point should be held in trust and released only after payment has been made.
- Hand over the account to a collection agency: If you firmly believe you'll never receive payment and are sick and tired of chasing after the client, hand the account over to a collection agency. Keep in mind these agencies will generally take a 25-50% cut of your receivable, so save it as the last resort.
- Take them to small claims court: Your final course of action will be to hire a lawyer and/or take your client to small claims court to recoup your losses. Sometimes simply mentioning that a lawyer is involved is enough to spur your client to action. If not, taking them to small claims court may be your best option. Keep in mind that most states will only allow you to sue for a maximum of $10,000; in some states this limit is as low as $2,500. Here's a handy chart of the small claims court limits for all 50 states.
Two final thoughts about delinquent clients. First, resist the urge to publicly shame them. Calling them out on social media can be tempting; after all, they've subjected you to serious financial hardship. However, keep in mind that public shaming tends to say just as much about you as it does about them. Second, vow to cut deadbeat clients loose, even if they do eventually pay. It's amazing how quickly we forgive and forget once a client has finally paid up. But if a client had the gall not to pay once, you can bet it will happen again. Protect yourself from future risk by cutting all ties and focusing on the clients who respect your time and efforts by paying on time.
Have you ever had to deal with a deadbeat client? How did you handle it? Share below!