7 Ways to Sort a ‘Slow Pay’ from a ‘No Pay’ Client
It’s an all too common dilemma for small-business owners: How much time do you give customers to pay overdue bills before writing off your losses as bad debt?
Deciding when it’s time to cease collection efforts can be a hard call to make. How do you separate the laggards who will eventually catch up from the deadbeats who will never pay?
Here are seven ways to sort out a “slow pay” from a “no pay” client:
1. Submit timely invoices. If you delay your billing, a client may conclude that your invoice can safely go to the bottom of the stack. Some people fully intend to pay but take their sweet time in doing so. Don’t encourage them by procrastinating yourself. Try using invoice templates to make it easier and faster to create and send your invoices.
2. Keep a record of the debtor’s response to forbearance. Be sure to record not only payments made on a customer’s account, but also any letters, phone conversations, and emails related to your collection efforts. Over the course of several months, payment records will yield important clues about the debtor’s character.
3. Encourage communication, but tread lightly. When circumstances beyond a client’s control create cash-flow problems, he or she may feel ashamed. Make sure that your collection efforts allow the client to save face — otherwise an honest debtor may avoid your calls due to embarrassment. The resulting lack of communication may cause you to believe the account is a no pay versus a slow pay. Be empathetic to avoid losing a good client who is simply going through temporary difficulties.
4. Keep a close watch on key accounts. Some Fortune 500 companies choose to pay late as a cash-management strategy. A small business could go under if forced to wait months to collect. Do a web search and read the latest news about your clients, which should give you some insight into the health of the business. Assess how much credit you can safely extend to any particular account without putting your business in jeopardy.
5. Set a schedule for collection calls or letters. When you call, be forthright but friendly. This approach may encourage clients to volunteer information about their financial
situation, as well as their intentions to pay. If you follow up promptly on failed promises to pay, you may be able to quickly sort the honest late-payers from the disingenuous.
6. Beware psychological traps in collection efforts. One of the more onerous ones is the sunk-cost trap [PDF], which may ensnare a small-business owner into continuing to invest time and energy on a lost cause in an attempt to collect a delinquent account. Don’t let a no-pay client weigh you down.
7. Choose a point in time to move on. Pick a date to stop your collection efforts, and when you call it quits, do so with a smile. You never know: Today’s slow-payer could be tomorrow’s success story. A struggling entrepreneur who receives forbearance may later reward you with a generous contract.