Getting Your Customers to Pay: Part 1 - Tips for Protecting Yourself from Nonpaying Clients

As sure as eggs are eggs every business owner can expect to deal with a non-paying or slow-paying customer at least once in their business lives. The trouble is that many of us, eager for new business and income, overlook the fact that it invariably will happen to us.

For freelancers or independent contractors, having to deal with a non-paying client can be particularly challenging. "Good faith" or loosely structured scope-of-work agreements are a common way for freelancers to engage in business. However, these are easily subject to abuse and provide little legal recourse when your client doesn't pay-up on time.

Likewise small business providers of project based services, which could include anything from accounting services to handyman services, are equally vulnerable to non-paying clients.

And without the advantage of a professional in-house collections department, the cash flow implications and task of collecting debt falls squarely on the shoulders of the business owner.

So if you are starting a business or have been in business for a while and have had enough of dealing with late- and non-paying clients, here are some tips for preventing and handling this troublesome issue.

Before You Agree to any Work - Develop a Payment Policy and Discuss it with Your Client

Consider developing a part-payment policy for project-based services. A professional and serious client should not mind paying half upfront (before any work is done) and the remainder on completion of the work. If they quibble, you have room to negotiate the percentage, but try to secure 50 percent of your fee upfront if you can.

Invoicing terms should also be agreed in advance. If your client is a consumer, be aggressive with your final payment terms - 7-10 days upon receipt of invoice is normal. For business clients (B2B), the industry standard these days is 30 days, but many companies can deliver within 15 days, particularly the nimbler smaller business clients, so don't be afraid to ask and negotiate.

If you are lucky enough to win a "retainer-based contract" with a customer - i.e. you set-aside an agreed upon amount of hours each month at a flat fee, usually on a use-it-or-lose-it basis - you may want to offer a discount off your hourly rate.

Retainers tend to be easier for freelancers and small businesses to handle and the work is often more predictable in nature than one-off jobs. In addition, the usual business admin tasks such as proposal writing are eliminated. If your client doesn't use the hours, the retainer agreement should stipulate that they still pay for those hours, although you may want to be flexible considering that the hours used often even out over time.

Consider a Late Payment Fee

If you choose to implement this "incentive" to payment, be sure to state it clearly in your contract or payment policy before doing any work (the law actually requires this in order to avoid violation of the Truth-in-Lending Act). Typically, late fees are a percentage of the total bill (usually 2 percent). If you feel the need to fall back on this when late payment occurs, let your client know that you are moving forward with this practice.

Also be aware that interest charged on late payments may be subject to state usury laws limiting the amount of interest that can be charged. If the maximum amount of interest is exceeded, the debt may be forfeited and a penalty assessed. Check what laws apply within your state here. 

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Look out for part two in this series, which will outline options your small business might consider for collecting or pursuing client debt.

Additional Resources

This "Small Business Guide to Managing Finances" also provides tips for accepting cash and checks, accepting credit and debit cards, as well as extending credit.

And this useful article from Inc.com – “How to Collect from Anyone (Even Enron)” – offers tips for 30 ways to get paid in 30 days!