Make a Plan to Get Paid by Your Customers

Extending credit requires a policy and strategy for collecting your money when clients don’t pay up.

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Extending credit and utilizing an invoicing system is a necessary prerequisite to growth in the commercial arena and, in some cases, the consumer market as well. Commercial end-users and contractors will typically not work with companies that refuse to extend credit terms, and in some regions, this reaches into the consumer market too.

The dark side of extending credit is that sometimes those terms come and go, and it becomes a task to collect the money that’s now past due. There are many reasons why this happens — from lost bills to unexpected additional expenses that the customer could not afford. Regardless of the circumstances, an unpaid invoice can hurt your business, and you need a game plan in place to ensure payments are received.

While you can never guarantee a customer will pay a bill on time, there are things you can do to keep late or missed payments to a minimum in the future. Being clear about all terms and conditions upfront not only sets payment expectations for the client, but also builds the trust necessary for a strong, positive customer relationship, says Greg Waldorf, CEO of the invoicing app Invoice2go. Before diving into a project, he notes, make sure that your client is fully aware of projected costs, and ensure that you take time to answer any questions upfront.

It is also essential to clearly have all of the payment terms and conditions in writing and easily accessible to customers. “You cannot have payment terms written in too many places,” says Nadine Ebersole, an associate business attorney with Robinson & Cole in Boston. Those terms and conditions “should be on proposals, purchase orders, invoices and even on the company website if there is one,” she says. By being extremely transparent, businesses are taking smart measures upfront to be both clear to the customer and protect the interests of the business.

When contemplating work with customers that seem risky upfront, most experts advise tiptoeing into the account. “It’s a good idea to have a policy in place that may require money upfront for any new account,” Ebersole says. This allows you to point to something in writing when asking for full or partial payments from a new prospective client that seems a bit shaky.

And if a new account refuses to pay upfront, it is advisable to start out with a small project to test the waters. If the first project becomes a collections matter, it is at least kept to a minimal amount. But business law experts like Ebersole do note that no business should be afraid to turn away work if the risk of a particular customer far outweighs the potential reward.

To provide some reassurance for those particularly wary of submitting payments before receiving work, encourage them to read testimonials or reach out to previous customers. “If you have a spotless track record and take care of clients consistently over time, you will earn a greater right to take payment prior to work,” Ebersole says. When someone questions a policy, businesses with excellent track records encourage them to call specified clients and ask about their reputation and integrity as an organization.

With so much going on in a small-business environment, it can be easy to lose track of a customer invoice. Experts generally advise appointing one individual to be in charge of sending invoices as soon as a job is completed — and staying on top of it until it’s closed out — to avoid falling behind.

In an ideal world, all customer invoices would be paid in a timely manner, but that simply isn’t reality in the contracting environment. The very business model of doing the work today and billing for it tomorrow paves the way for some customers to be better payers than others

If a customer is late on an invoice, start with a friendly reminder that a bill is past due — the first step in collecting your payment. In many instances, a late payment is the result of an honest mistake, and receiving that first follow-up will make a client pay as soon as possible. Waldorf notes that the subject of money isn’t always easy to address, so you may want to ease into the topic. “Use an opportunity to check in on a customer’s satisfaction with your services, and then discuss any approaching or past-due invoices,” he suggests.

In some cases, clients will try to delay payment by saying they lost the bill or that they need to reconcile their records to find the correct payment amount. If this is the case, Amanda Vann, collections attorney with Baltimore-based law firm Andalman & Flynn, advises sending an updated invoice right away — even if you know the customer has the original — to take away this excuse.

If your client still won’t pay, be open to hearing their reasons. Vann suggests asking questions about their satisfaction with your work, their financial complexities and anything that might contribute to their refusal to pay. “Once you know why they refuse to pay, you can work toward a resolution with the client,” Vann says. “Keep in mind that everyone is just a person, and rarely is someone actually out to hurt the other. Most people are logical and willing to work toward a solution if you provide them with the opportunity to do so.”

Waldorf advises requesting a timeline for payment and continuing to follow up until the customer pays. If necessary, resend your original purchase order, indicating that you will escalate the situation if invoices remain past due.

If repeated attempts to contact the customer and collect a payment have failed, it may be best to call in backup, but this should be a last resort, as it can be expensive and can permanently damage a relationship. Even if a customer has issues paying a particular invoice, it’s possible their receivables are simply high and they are strapped for cash at that moment but are not necessarily a poor customer.

If third-party assistance becomes essential, there are three options to help get the money you’re due.

1. Factoring Services: If you’re strapped for cash and don’t know when a customer will send their payment, a factoring service may be able to help get the money you need while you’re waiting. With a factoring service, you sell your accounts receivable to a company for a certain percentage of the accounts’ value (usually 70 to 90 percent), and that company will advance you most of that money within a few days. It will then collect your customers’ payments and send the rest of the cash to you, minus the service fee.

“Keep in mind that factoring services are not collection agencies,” Waldorf says, “and they will run a credit check on your customers before agreeing to purchase their invoices. If you use a factor for multiple customers’ invoices, the service fees will add up, and you may end up losing money in the long run.”

2. Collection Agencies: A debt collection agency is a company that specializes in recovering payments that are typically more than 90 days past due. The company will take the task of following up with the customer off your hands to get them to pay.

3. Attorneys: While you can file a lawsuit against a customer who won’t pay up, the time and money associated with suing a nonpaying client is not worth it for most small businesses unless the amount owed is substantial.

“We do a very honest cost analysis when considering a lawsuit,” Vann says. “Is the total cost (financial, emotional, time, energy, etc.) greater than the amount to be recovered? If it’s more work to recover the money than it’s worth, just learn the lesson, put in a system so it doesn’t happen again, and move on. However, if that client owes you a large sum of money and refuses to pay you or a collection agency based on the terms of your contract or invoice, a lawsuit may be necessary.”

In many cases, it may make more sense to negotiate with the customer yourself than to utilize a third-party service. “Some customers simply do not have the funds to make a one-time payment,” Ebersole says. “Try working with the customer to determine if installment payments or a one-time payoff are feasible.” 

She adds that you should document any agreement you make in writing and have the customer sign a copy acknowledging the terms.


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