One of the toughest things about running a small business is dealing with non-payment on invoices. Unpaid invoices can cause a big disruption for your cash flow, and because you don’t have a finance department to do the chasing for you, you often find yourself in the awkward position of chasing the same client that you’ve built a relationship with. Before we tackle the issue of non-payers make sure you have the best procedures in place to ensure you have the best chance of getting paid on time.
Set expectations. With every new client make sure you establish your payment terms as early as possible. Explain when and how you invoice, and when you expect invoices to be settled.
Require payment or partial payment upfront for products or services (e.g. a deposit to cover your fixed costs). Requiring a minimum deposit is fair and minimises risk of non-payment.
Understand contracts. A quote or service agreement document are both examples of contracts and an engagement letter outlines what is expected of each party over the course of a project.
Following this have processes in place for collecting money on invoices. Once the initial invoice has been sent out and the number of days in the terms set has been passed (be a little lenient, give it a couple of days before you chase your client) you could:
Re-issue past due bills. Reach out to the client and ask them if the bill was received and is in process. You may need to re-bill as a gentle reminder. You can also send a monthly statement with the outstanding amount owed (with interest, if your policies or contract stipulate a late fee) clearly labelled as past due.
Get to know your client’s accounts department or speak to the client personally. If payment is still not forthcoming, seek out the accounts payable department. Check whether the invoice was received and if you can help in any way. All the while, maintain a steady and friendly relationship. Don’t hang up until you get a verbal agreement confirming when the payment will be made. Follow-up over e-mail confirming the conversation and maintain a paper trail.
Don’t apologise. Stick to your guns and never apologise for chasing payment.
Offer a payment plan. You may want to offer a payment plan, especially if you have a good relationship with the client and they are having cash flow problems.
Hire someone else to chase. Not only will you avoid the headache of chasing payments, but hiring a professional will give you a greater chance of getting paid.
If your invoices are still not being paid you may need to get to the bottom of why they aren’t being paid. Is your client unhappy with your work or with you, and feel they must withhold (or reduce) payment until things are resolved?
If there was a true error on your part, apologise and work out an adjusted payment schedule. Think carefully about whether you should argue it out or just accept their suggested cut. If you want to work with this client again, it may make sense for you to take a hit now to preserve the relationship. There are a thousand tiny factors that would go into making this decision, but listen to your instinct.
If you underestimated the job and are suddenly dropping an invoice that is significantly higher than what you quoted into their inbox, you’re asking for trouble. If you didn’t warn the client that the final cost might be 10% or 20% higher than your quote, you have no post-delivery leverage. Instead, you should work out an adjusted project proposal as soon as you see the potential of the project expanding. During the project, when a new item is added, simply say “Sure, I can do that. We’ll just have to revise the project proposal, that OK?” or “That may take a few extra hours of time. Is that OK?” Best to get that in writing, so that if they balk later, you can show their agreement. A lot can happen during a project and it can be easy for the client to forget.
If the client is unhappy for unreasonable reasons, it may mean that there was a failure of communication. Sometimes you think your work is perfect, and the client thinks the work is unusable. In these cases, you often try to get someone you know to provide an opinion of the work, and the client finds someone who sides with them. Perhaps a mediation service can assist in these circumstances. It is likely to be a better solution than court.
Evaluate your own communication style and approach. It can be easy to get frustrated by a client that is ignoring you (or that you assume is ignoring you). But how you communicate, and the methods you use to communicate may be part of the issue. Don’t text. Don’t DM. Don’t FB message them. Registered letters can help. Phone calls can help. But things are always better if you can meet with someone face to face to talk about things. After all, we are all much more prone to aggressiveness when online (and don’t have to face someone before we’re rude). In person meetings are always more tame and professional. And do a fair share of listening. The customer may feel like that last payment is the only thing they have left to hold back before you walk away. Sometimes just explaining the next steps, post-deployment, can really help someone understand that they’re doing themselves a disservice.
Lastly, factor non-payment into your rate. Hopefully, this will come to no more than 2% of your total gross sales. Over the course of a financial year, most small businesses have to write off some projects as debts. Your planning needs to take this into account.
Usually, if a client has paid a few times, you will not have trouble with them paying in the future. However, this is not always the case. Be consistent with chasing your debtors, no matter who they are. Yes, it takes time — but this is another reason to factor non-payment into your rates. Business involves gambling with people from time to time. Sometimes you lose out, and the only good option left is to walk away graciously.
If all else fails, however, and you have followed all of these approaches and the payment and loss that your business will incur overrides all other factors then it is time to seek legal advice but it may cost you more in time and money than the original payment — with no guarantee of success.
Disclaimer: The advice contained in Balance Books blogs and newsletters is of a general nature only and may not apply to your individual business circumstances. For specific advice relating to your situation, please contact your Accountant or other professional adviser to discuss further.