Do you have customers who never pay on time? You’re not alone: 64 percent of small-business owners have unpaid invoices that are at least 60 days old, according to the National Federation of Independent Business.
The problem is most likely not that you're invoicing your customers improperly (though you should probably review these steps, just in case). So what can you do? Try the following seven tips for getting what's owed you.
1. Be mentally prepared.
It’s important to be committed to getting paid, because late-paying customers will have all kinds of excuses. You need to be friendly but professional, and stay firm. If you can’t approach the collection process with this mindset, customers are going to walk all over you. If you’re not a good negotiator, delegate collections to someone in your company who is. (Be sure to make it part of someone’s job rather than an afterthought that a busy employee handles on the side.)
2. Follow up.
Too many entrepreneurs let late-paying customers slide, whether because they don’t want to confront or offend or because they’re too busy to track receivables. First step: Use your accounting software to review your receivables at least once a week. Then develop a system for following up with payments that are three days, one week, 15 days, 30 days and 45 days late—and stick to it.
3. Start by sending a reminder letter.
Letters are a polite way to remind customers of payments they may have overlooked. (It’s actually a good idea to send reminders a few days before a payment is due.) Create a standard form letter you can use in each situation; since it’s a form letter, customers aren't likely to take it personally. Be sure to end the letter by asking your client to contact you to discuss payment—this gives them an “out” if there's a problem on their end.
4. Next, make a phone call.
If 30 days have gone by and you haven't heard from your client or received a payment, it’s time to get on the phone. Phone calls are harder to ignore than letters, and in many cases, speaking to you can spur a client to spill the beans about what’s really preventing them from paying.
5. Don’t threaten the client or get angry.
At this point, your goal is simply to figure out what the problem is and how you can possibly get paid. Assess how valuable the client is to you, how likely they are to recover from the current difficulty and become a paying customer once again, and how much of the money owed you can reasonably hope to recoup. Here are the most common options:
- Ideally you want to get all your money back. Offering the client an installment plan is often the best option for accomplishing this. Someone who can’t pay a $10,000 lump sum may be able to pay you $500 a month for 20 months. Depending on your original agreement with the client, you may also be able to charge interest or late fees—but if this is going to make it hard for the client to pay you at all, it might be best just to charge them the original amount.
- Partial payment is another option. In the example above, if you can’t afford the hit to your cash flow that an installment plan would cause, you could offer to accept $6,000 as full payment for the $10,000 owed. This way, you get some money faster at the cost of a long-term loss.
6. Take legal action.
If you try the first five steps and your customer still doesn’t budge, then it’s time to take legal action. Have your lawyer write a demand letter—a certified written letter that threatens the client with legal action if the debt isn’t paid. Customers who aren’t scared by letters and phone calls from a business often feel threatened enough by a demand letter to pay up.
7. Consider taking your customer to court or hiring a collection agency.
Your lawyer can also advise you whether doing so would be worth your while, how likely you are to get paid and what his or her fee would likely be. If you don’t want to get involved in a court case, you can hire a collection agency. Collection agencies typically take a percentage of the money they recover for you; sometimes, they’ll buy your debts outright and handle collecting the money themselves. In either case, you’re likely to get only a fraction of the overall amount. Weigh the possible outcome—including the customer’s ill will—against the collection agency or attorney’s fees before you choose either of these options.
No matter what happens with a particular late payment case, use it as a learning experience and build safeguards into your credit and invoicing policies going forward to prevent late payments in the future.
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