How to Know When Your Customer Isn’t Likely to Pay
It’s tough enough to drum up clients. For a business being bootstrapped by its owner, getting stiffed for services rendered can spell financial trouble.
Just how bad is the problem? The Freelancers Union in 2012 started an open letter to nonpaying clients dubbed “The World’s Longest Invoice.” To date, it’s garnered thousands of responses from small-business owners and independent workers who’ve shared their stories and balances due. The grand total uncollected so far: $16 million.
“It happens because people get away with it and because small-business owners often do not have the time or resources to pursue deadbeats,” says Jennifer Kluge, president and CEO of the National Association for Business Resources.
Rita McGrath, co-author of The Entrepreneurial Mindset and an associate professor at Columbia Business School, says even she is waiting for a check to arrive. “I have a client who runs a supposedly reputable U.K.-based events company who still hasn’t paid me for an engagement I did in December of 2012. Very annoying.”
To avoid finding yourself in a similar situation, it’s best to steer clear of potentially problematic clients. Here are some telltale signs to watch for, plus a few tips for dealing with deadbeats and improving your invoicing system (to reduce collection issues).
Just Say No
For starters, steer clear of clients who fail to meet your basic requirements. McGrath is wary, she says, whenever “they give you only a post-office box and mobile number for contact information; they fail to pay a deposit or down payment, even if you’ve asked for one; they ask for really long payments terms; or they fail to sign a contract.”
Russ Hovendick, founder of coaching firm Directional Motivation, also advises that you proceed with caution if a client is initially more concerned about costs than the services or products you provide.
Joe Silverman, CEO of New York Computer Help, adds that “if [clients] are hesitant to give a credit card to reserve an appointment, they will be more hesitant to pay.”
“We all want to make sales and make money, but if a customer isn’t comfortable with the purchase, don’t force it. You may get the sale by forcing it, but it will backfire on you. Forcing a sale on a client is a red flag that something will go wrong down the road,” says Zachary Lezberg, CEO of the Small Business Expo.
That hesitant customer may be the one who dodges calls and ignores your emails about payment. According to Kluge, a nonpaying client may also ask for multiple copies of the invoices because “it’s lost,” or ask whether you accept credit cards when you’ve already specified that you don’t.
You also may get a sob story, like the client is waiting on a payment from a customer before he or she can pay you. You might even get a plea from the customer after you send the bill asking whether they can barter goods and services instead of paying with cash or check. Or they might start nitpicking at the work or products as a way to avoid or reduce payment, Kluge says.
Dealing With Deadbeats
How do you respond when a client refuses to pay? Be professional. “Be courteous and fair, but don’t be afraid to confront the issue,” Kluge says. If you are upset, write the email and set it aside for a while. Review it prior to sending, she advises.
Try to work out a payment agreement, so that you’re getting a set amount every month until the balance is paid in full, she adds. You can use a blank invoice template to help you create and send consistent monthly invoices.
Litigation should always be a last resort. If you get to that point, evaluate whether it’s worth it to you, as this route takes a financial and an emotional toll, says Jody Johnson of ActionCoach Team Sage.
When it comes to getting paid, having a strategy can save you a heap of headaches. “Invoice in a timely way, with payment upon receipt terms whenever you can. I can’t tell you how many small-business owners have sloppy billing practices and are not on top of their receivables,” Johnson says.
Get payments up front when possible, and stagger payments when you can’t. “One of my furniture-manufacturing clients takes a large deposit up front so he can cover his cost of goods sold involved in making the piece. He then collects another percent upon shipment, and the last 10 percent is collected upon installation of the piece. This allows both him and the client to manage cash flow and expectations along the way,” Johnson says.
Hovendick says that it’s a big mistake to not have a system for collections. Being haphazard, hoping to get paid, is futile. Perhaps you have a letter that is sent once a payment is late, another when it’s 10 days late, 20 days late, and a point when you get firm and pick up the telephone for an explanation. Not only does a process help you monitor progress, it builds your case, and it’s tougher for the client to say you’ve been unreasonable.
A final tip: Make nice. “Create a relationship with the customer,” Kluge recommends. “It’s much harder to not get paid by people who know you and your business.”