Contracts, lawyers and collections agencies are a few places to turn when you have clients who won’t pay their invoices. Even better is to prevent the problem in the first place.
When you do business with a client, you expect to be paid for your labor, product or services. But what happens when those payments are late – or don’t come at all? It’s a question that comes up often. Fortunately, there are steps you can take to handle and even prevent the problem.
Preventing non-payments
Chasing a non-paying customer is often a messy process, so it’s best to avoid the issue altogether by taking the following precautions.
1. Research your client.
If you’ve never worked with a client before, do your research and find out who you’re dealing with. Google their name, ask your contacts if they know anything about your new prospect, run credit checks on them, and, for business clients, see if there are any complaints against them on sites like the Better Business Bureau.
“Most non-payments can be prevented or severely minimized by screening the customers in advance,” said Jocelyn Nager, president of legal firm Frank, Frank, Goldstein & Nager. “Thanks to all information available on the internet – especially the court records, notice of liens and more – most often you can run a risk assessment on your own … and the possibility of non-payment should be reflective of your tolerance for risk.”
2. Have a contract.
No matter if the client is your best friend or one of the most respected business leaders in your industry, always have a written contract in place. The contract should address these legal concerns:
- Payment schedule: e.g., 40% deposit, 40% milestone payment and 20% upon completion
- Terms: e.g., payment either 30, 60 or 90 days after the invoice is sent
- Preferred payment method: e.g., checks, credit card or PayPal
- Scope: the exact work you are expected to complete
- Deadline: expected completion date
- Late payment policy: the amount charged if an invoice is not paid on time
It’s essential to get all details in writing so you don’t face issues down the road. For instance, if your client is aware they owe fees for overdue expenses, they’ll be less likely to flake – and if they do, they’ll be forced to pay interest. But if you fail to set up a contract, nothing is guaranteed.
“Often when assisting clients who are being charged interest, late fees, or legal fees, I will ask the company for anything in writing and signed by my client that permits them to do so,” said Thomas J. Simeone, trial attorney and managing partner at Simeone & Miller LLP. “When they cannot do so, I explain that interest and fees are not part of the contract and therefore are not allowed.”
Don’t set yourself up for problems that are easy to avoid. You can find service contracts for free and online.
3. Ask for a deposit.
If you ask for a portion of the payment upfront, you’ll absorb some of the hit. Asking for a deposit or retainer is common for freelancers when they negotiate with clients and will help cover the expenses or time that you already put into a project.
According to Tina Willis, owner of Tina Willis Law, the amount you should ask for depends largely on the industry. If workers in your position do not typically charge retainers, consider installment fees, which are paid as you complete certain parts of the job.
“That way, you are less likely to do way too much work before getting paid, or realizing that you are never going to be paid,” Willis said.
4. Offer early payment discounts.
For large invoices, your customers may be more likely to pay in full (and sooner) if you offer discounts for early payment. For example, if you file a $10,000 invoice due 30 days after receipt, then you can offer a 3% discount ($300) if your client pays within 15 days. You can also stagger your early payment discount by taking this discount down to 1% ($100) if paid between 15 and 30 days after invoicing.
5. Allow payment in installments.
If slightly delayed client payments won’t drastically interrupt your cash flow, installment-based payment plans can create a middle ground for you and your client. For the $10,000 invoice example, you could offer a payment plan of $5,000 within 30 days and then one $2,500 payment each 60 and 90 days after the invoice, which can maintain your cash flow while easing the client’s burden.
6. Charge late fees.
To incentivize timely payments, list the late fees and their effective dates in your invoices. Alternatively, you can send your client a new invoice with added late fees after a certain period of no payment. If you retroactively add late fees, warn your clients first.
