When to get tough with a deadbeat client

Expert tips for picking clients wisely and getting paid on time.

Denise Haney, Orem, Utah
How can I get our clients to pay up? There's a fine balance between getting our money and losing them as clients - but when invoices are past 100 days, isn't it time to get tough?

By Kathleen Ryan O'Connor, CNNMoney.com contributor
It's tough asking for money, and no one wants to risk losing a client. But letting payments arrive on the client's schedule, not yours, is the quickest way to "nice" your way right out of business.

The first step, experts and seasoned business owners say, is to take the emotion out of the process and set up a system that works in your favor.

"Money is sort of a taboo topic," says Victoria Merriman, design director and founding partner at Digital Loom, a Boston Web design and branding firm. "I've really struggled to overcome that. One thing that is very helpful - be really, really transparent about the money."

In addition to contracts that spell out the scope of services and payment terms, Merriman's company builds payment dates into the project milestones that it shares with clients.

"They can see exactly when payments are due," she says. "Be really clear at the outset. That's helped a lot."

But if it's too late for a solid contract and friendly reminders, it's time to think about the best way to collect.

"Make contact right away," says Jennifer Katrulya, CEO of Business Management Resource Group, a firm that offers outsourced CFO and bookkeeping services from offices in Danbury, Conn. and Rhinebeck, N.Y.

If your client can't pay everything they owe at once, offer to set up a payment plan. You can also take payment in ways other than through checks: The Internet has made it cost-effective for even the smallest businesses to accept credit card payments. If you have a PayPal account, clients can send payment through it, and if you use Intuit's QuickBooks, you can link the two systems and automatically send invoices that include PayPal payment links.

Integrating an e-commerce system into your Web site is another way to make it easy for your customers to pay. Robin Robins, entrepreneur and founder of the Technology Marketing Toolkit, uses 1Shopping Cart, but there are plenty of others to investigate.

Accepting plastic makes getting paid much easier, she's found. "Of my 3,000 customers, 99.99% are on credit cards," Robins says.

If your client is still overdue and unresponsive, it's time to escalate your collection measures. One option is to go through business data aggregator Dun & Bradstreet. If your client is a business, D&B can act as a debt collection agency.

"It's a way to become a true creditor and get to the top of the pile," Katrulya says.

Beyond that, she says, it gets trickier.

You can go through Small Claims Court, which is inexpensive but time-consuming.

In your home state, Utah, you can try to recover up to $7,500 in small claims court. The filing fees are modest and you don't need a lawyer. According to the Utah state courts, it costs $45 to file for claims of $2,000 or less and $70 for claims of more than $2,000.

You could also contract out or sell the debt to a private collections company, but pay close attention to fees and commissions - it may not be worth it.

No matter what you try, some bills may never be paid. That's a frustrating reality for all business owners. Katrulya recommends budgeting for some percentage of your receivables to be written off as bad debt. Companies such as ProfitCents can provide information on bad-debt trends for your specific industry.

Former corporate executive and business coach Paul Lavoie of ActionCoach of Connecticut says that above all, you shouldn't worry insisting on getting paid on time will mean losing valuable customers.

He recalls a telecommunications client who had to buy a lot of expensive hardware upfront. He counseled them to change their invoicing procedure. Rather than laying out all that cash and waiting a long time to see returns it on, they created a new contract that requires customers to pay for 50% on signing, 40% on installation and 10% on completion.

"They didn't lose a single customer," Lavoie says. "No one blinked. They were blown away."

And what's the worst that can happen?

"You lose customers who aren't going to pay you anyway," Lavoie says. "When did you become a bank?"

Don't be afraid to start refusing service once customers are significantly late on their bills.

"I've had to take web sites down," says Web developer Merriman. "That really got people's attention."

Anything you can do to make your service invaluable to clients' day-to-day operations will increase your chances of being paid promptly. As Robins puts it, "How do we make ourselves so essential to our customers we will be the last bill they will be late on?"

And at the end of the day, if asking for money is just too far outside your comfort zone, don't be afraid to delegate. In Lavoie's ActionCoach business, receivables go right to his no-nonsense business manager.

"Who doubles as my wife, by the way," he quips.

Give us your advice: Check out recent "Ask & Answer" questions.

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