Handling Customers Who Do Not Pay

Being an entrepreneur can be one of the most rewarding experiences you can ever have; you get to set the rules, do work you love and get paid for it.  True, there is always a downside of not working for a large company and one of the biggest is having to deal with “deadbeat” customers.

The Snackbox team defines a “deadbeat” as a client who hasn’t paid their bill within the mutually agreed-upon time frame.  For Snackbox, our payment terms are measured in days, not months, and anyone that goes beyond that is not a customer we’d like to keep.

Deadbeat customers, those who do not pay in a timely manner, are a fact of life for all business, but they impact small businesses more, because most small businesses are running on tight budgets, where every cent matters.  Being able to count on customers to pay on time is what keeps small business in … well … business.

Wondering if you’ve been a victim of a deadbeat customer?  Here’s how to spot one in the making:

  • Eager for you to get started, often without a signed contract
  • Does not want to discuss payment terms
  • Payment for services starts out close to being on time but then gradually takes longer and longer
  • It gets harder and harder to get in touch with the client, often in direct relation to how long it takes to get paid

We’d all like to go back to the days of doing business on a handshake, but in today’s business climate, it’s almost impossible if you want to stay in business longer than a week.  The best way to avoid dealing with deadbeat customers is to make sure you sign a contract with each customer prior to starting work and having your payment terms clearly spelled out.

Talking with a potential new client about the scope of work is the easy part of a business relationship, but talking about money can be the toughest part of the conversation.  It’s important to discuss how you’re to be paid, though; a client is worth having who respects your work enough to be willing to pay on time.  If a new customer does not want to talk about money, it’s a clear sign you’re in for trouble.

Even with the best customers, you may still find yourself having to deal with a deadbeat customer.  Here are some tips for handling the situation in order to protect yourself and your business:

  • Put all communications about invoices in writing, either through email or snail mail, so you have a strong paper trail, even with customers who pay on time
  • Calendar your accounts receivables so you know when to expect payment on all invoices
  • As soon as you notice someone has missed a payment date, begin a diary of attempts to collect
  • Alert your lawyer as soon as you start attempts to collect to have them on standby
  • Consider offering a payment plan, but make sure to get it in writing
  • Create business guidelines for dealing with slow and non-paying customers.  For instance:
    • The first time a customer is late, but payment is made within 15 days of the due date, you cut them some slack; we all get behind from time to time.  The second time, you would put them on notice and the third time would mean you sever your business relationship once payment is made.
    • If payment is between 15 and 30 days past due, stop all work for the client until payment is made and once you receive payment, advise the customer that you will be dropping them as a client.
    • If payment is 60 days past due, declare the customer deadbeat and move on to the lawyer stage.
  • Once you’ve gone past the timeframe for pursuing your own efforts to get the client to pay, it’s time to turn your detailed diary over to your lawyer for collection.  More than likely, your lawyer will attempt to collect without filing a lawsuit by writing a letter on your behalf.  If that does not work, a lawsuit will be filed.

It’s always best to try to work out payment issues with clients before they reach the lawsuit stage.  Lawsuits are not always a foolproof means of getting paid.  Remember that every lawsuit brings with it court costs and lawyer fees and even if you win the case, you still have to collect.

The bottom line is, before you sign on your next new client, make sure you talk to a reputable lawyer to help you draw up a contract that will protect you, don’t let emotions or eagerness lead you into accepting a client who may be a deadbeat and keep great records of all your dealings with customers, especially financially.  After all, your business and your employees depend on it.