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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From Harris Brown, New York Get the money upfront if you can especially in a design business. We always ask for the credit card and charge before we start any project. If a project is less than $1,000 we charge up front. We do media buys and we charge the credit card or get checks up front these days everyone is short for cash and you are not a bank tell like it is who needs the stress of collection and a bad client. Let them walk another client will come along.
Tell them do you work for free. Clients who look for a bargain will give you a hard time. We have clients you spend thousands and don't complain about giving a check or credit card upfront as long as the work gets done.
Thanks http://www.hfbadvertising.com
From Bob – Boise, ID One thing that it is very hard to convince small business owners of is that losing deadbeat customers is actually a good thing. If you you have people going out over 100 days, you need to put them on cash or credit card terms only.
Eventually what will invariably happen is that these types of customers will file for bankruptcy or just disappear. If that happens, you've not only lost your profit but your cost of your goods and services as well. One large account that does this can wipe out months of profit in a small operation.
It's a tough choice, but unless you are a bank or loan company, those bills need to be collected.
In one of my companies that does onsite computer service, years ago we finally had to put almost all of our clients on credit card or check upon work completion. We got tired of billing companies then 2 months later arguing with people over how much was owed – they always wanted to negotiate. We figured if they didn't have the money to pay us at the time of service, they wouldn't have it a month later, so we went cash up front.
One final thing – if you lose a customer because you won't give them extended credit terms, it most likely isn't a customer worth having in the first place.
From William Eisenhauer, Tigard, OR Give them an incnetive to do so. I always set up the intial contract so that if they pay within 30 days they get a "discount" of 20%. After 30 days, they owe the whole thing, I have never had a client yet go 30 days, in fact they call around day 25 to confirm I got the check.
I did the same with with a home rental I had, if they paid rent prior to the the 1st they got an immediate $100 cash back, not $100 off..but handed them a $100 bill as soon as their check cleared. Never once had a late rent check.
Works like a charm.
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Costs of collections exceeds profits.
No bank or business needs that.
Troublesome clients use factoring.
Get other business.
Gettting less headaches.