You work hard to generate sales and expect to be paid in a timely manner. But what if that doesn’t happen?
If your invoices don’t get paid, your business’ cash flow falters, and stagnant cash flow is a surefire way to business failure. This makes it a necessity to be proactive in pursuing payments from delinquent clients. After all, outstanding accounts receivable (unpaid invoices) are not like fine wine: They don’t get better with age. What’s more, if you’re in a service business and use the cash method of accounting, you can’t even deduct the unpaid amount, and all your labor is down the drain.
To help ensure you get paid in full and on time, here are some of your options when it comes to tracking down clients with past-due invoices.
1. Follow Up on Your Own
Never hesitate to follow up on an invoice, and don’t feel like a nag when you do. Prompt action and persistence may be uncomfortable, but it just may pay off. And the alternative (i.e. not getting paid) is definitely worse.
When creating your service agreement, set your company’s policy on what constitutes “lateness” (e.g. 30 days beyond the expected payment date). Your decision about lateness may be influenced by how much you value the customer and what you know about the customer’s history in paying prior invoices; for example, a customer may habitually be late, and you needn’t worry about receiving full payment because it always gets to you eventually.
As soon as this late period has passed, follow up with a second (“past due”) invoice or a telephone call. A client that is experiencing cash flow problems may need some understanding on your part. For example, the client may agree to pay monthly installments, enabling you to collect the full amount at some point while preserving the business relationship. Some businesses may put a clause in their invoices to impose interest charges on late payments. While this is perfectly legal if done correctly, it can be very tough to enforce.
Whatever you do in pursuit of collections, be sure to not violate the federal Fair Debt Collection Practices Act. Calling beyond business hours, using abusive language or making threats is illegal; on top of that, it can also lead to damaging criticism on social media. While it’s easy to get upset with delinquent clients, it’s vital to keep your cool and maintain your professionalism throughout the process.
2. Use a Collections Agency
If your actions have been unsuccessful, and you decide to use a collections agency, you’re engaging a company to act as your agent in pursuing your money. Typically, businesses use collections agencies when a receivable remains unpaid after more than 90 days. A collections agency can help with unpaid amounts as small as $50. They will also ask for proof of the debt, so be sure to get everything in writing.
Unfortunately, because of agency fees, turning to a collections agency means you’ll never recoup all of what you’re owed. Agencies typically charge a percentage of the recovery (i.e. 15%, 25% or more), but there’s usually no charge if they fail to recover your cash. There’s no guarantee that the agency will recover 100% of the outstanding amount, as the agency may accept partial payment or payment over time. However, the old proverb, “A half a loaf is better than none,” is right, and you should recoup as much as possible through this action.
Here’s how the arrangement works: Say you’re owed $2,000, and the agency charges 25% of the recovery. If it recoups 60% ($1,200), you’ll net $900.
Check with the Better Business Bureau or your local Chamber of Commerce to find a reliable agency. It may also be wise to use an agency that is a member of the International Debt Collection Association, because, in order for the agency to be accepted into the association, it has to agree to follow an ethical and professional code of conduct.
3. Sue in Small Claims Court
If your actions don’t produce results, and you don’t want to use a collections agency, you may be able to take the matter to small claims court. States have individual limits on the dollar amount you can sue for in small claims court, so do your research to make sure small claims is actually an option for your case. These limits range from $2,500 in Kentucky and Rhode Island up to $25,000 in Tennessee. Small claims court has informal procedures, so you save money by not hiring an attorney and avoiding high court costs.
However, you need to recognize upfront that, even if you obtain a judgment in your favor, it’s no guarantee that you’ll collect what you’re owed. You will need a sheriff or other law enforcement agency to seize the customer’s bank account or other property to satisfy the judgment. If you can’t collect on the judgment, at least you can have the satisfaction that it will adversely impact the client’s credit rating.
4. Engage an Attorney
Depending upon the amount outstanding, you may want to use the services of an attorney. The attorney can first generate a letter requesting payment and saying that you will pursue all legal actions available to you. The letter may be all that is needed to spur a delinquent client to pay up.
If the letter doesn’t do the trick, the attorney can then sue on your behalf to recover what you’re owed. The legal process may be lengthy and costly, but when small claims court is not an option, this legal venue may be necessary.
If your client is out of state, the cost and hassle of legal action may be prohibitive. If the client is a business, you may stimulate payment by sending a letter to the attorney general of the client’s state. The attorney general’s office may prod your customer to pay up.
When your invoices don’t get paid, you’re putting your business at risk. So it’s important to know your options so you can decide which course of action is best. Of course, the best action would be to get paid on time and in full, so use our free custom invoice template so you can (hopefully) avoid these collections headaches.