If you run a service business or agency, you probably have had to deal with clients that are late with payments or just flat out don’t pay.
The list of excuses for late or missed payments that clients have can be tiring and frustrating.
In some of those cases, there are valid reasons as to why a payment can’t be made. In other cases you just feel like you’re being robbed.
The good news is that there are ways to mitigate your risks when working with clients, and also ways to collect payments if they refuse to pay you directly.
Start with preventive measures
The best way to avoid late or missed payments is to put in measures and processes that will help prevent them from happening in the first place. By creating an environment where everyone feels respected, trusted, and on the same page, you increase the chances of having a great working relationship.
Set payment expectations by discussing projects costs and payment terms before you start a project
When discussing the scope, deliverables, and expectations of the project be sure to also set payment expectations. Clearly outline any fixed fees, variable costs, potential add-ons, and establish due dates and timelines.
By being upfront and honest about all charges, you’re building trust with your client. It’s important to do this at the beginning of a new project, because it sets a standard and precedent for the rest of your working relationship with this client.
Notify clients of any unexpected changes or expenses
As you work on the project, you may come across an unexpected expense or challenge that increases the variable cost. If this happens, notify your client immediately. Let them know exactly what happened in as much detail as possible, and how it will affect the payment terms.
Letting them know as soon as possible not only gives them time to prepare, it also helps to build trust.
Request an initial deposit or full amount before starting any work
A great way to test how committed a client is to working with you, is to ask for a deposit before starting the project. This can either be a percentage (typically 25-50%), or the full amount.
If a client refuses to pay this deposit, it’s a good sign they will either be late with their final payments or not pay at all.
There may also be situations where they are just a little hesitant to pay any deposit before seeing results. In this case, refer them to past clients and let them have a conversation with them. Hopefully you impressed your previous clients enough to where they have nothing but high praise for you and your work.
If a client still refuses to pay this deposit after speaking to previous clients, it’s probably best to walk away from the project while you still can.
Set up payment plans
There may be some cases where a client would like to pay you the amount they owe, but they just don’t have it at the moment.
Setting up a payment plan with affordable monthly installments might be the best opportunity for you to get the money you’re owed, and to maintain a good working relationship with this client.
Sit down with your client and find a middle ground with both the monthly amount and the payment plan length. You might also be able to work in an interest percentage as well if the payment plan length is longer than you’d like.
Charge late fees
Let your clients know that there will be late fees added to their outstanding debts if they do not pay in time. Notifying clients about these fees before you begin a project may make them think twice about paying late, or not paying at all.
Clients still not paying invoices
Even after taking these preventive measures, a client still may pay late or ignore the invoice entirely. Thankfully, there are different avenues you can take to try to get your money.
Friendly reminders
A couple of days after the due date, send a follow up email to the client to remind them that their bill is past due. Sometimes clients are so busy that they forget or just don’t have time. If you really enjoyed working with this client and value the relationship, consider waiving any late fees if they are only a couple of days or weeks late.
You can also use this opportunity to check in on how their business is doing, and if they need any more help. If they do respond saying they could use more help, obviously wait for the original invoice to be paid before you start any other work.
Send a ‘demand payment letter’
This is a formal letter that clearly outlines how much a client owes you and when it was supposed to be paid. You also would want to describe the consequences that the client can face if the debt isn’t paid. Some of those consequences include being fired as a client, and/or potential legal action.
Collection agencies
If the client continues to ignore you, the next step would be to contact a debt collection agency. These companies work to collect payments that are past due. Their job is to continue to follow up with the client so that you no longer have to. They may negotiate with the client to work on different payment plans or other arrangements.
When collection agencies start calling, people tend to feel more pressure to pay what they owe because their credit score may be severely impacted. They also leave themselves vulnerable to lawsuits from the collection agency.
Small claims court
As a last resort, you may have to take the client to a small claims court. It’s a relatively inexpensive and quick process. You don’t need a lawyer to help you present your case either. All you need to do is prepare and present your case. Bring any contracts, email records, and other pieces of evidence that may help your case.
If you win the case, the judge will demand that the defendant, the client, pay what they owe you. If they still decide not to pay or don’t have the funds at the moment, the courts can take a couple of different steps.
Wage garnishment is the most common and effective way to get a defendant to pay what they owe. This is when the courts take a percentage of the defendant’s wage and give it to you. They continue to take a percentage until the full debt is paid.
Moving forward
After all these preventive and reactive measures, you still may not see the money you were owed. The client might not have the money, or any income or assets for the courts to seize. In that case, you may not have any option other than to take the loss and keep going.
While these cases are rare, they can happen. Taking the time to do some research on your client and their business can help you avoid these situations, but there’s no guaranteeing it.
There’s a lot of pros and cons to running a service business or agency. There may not be a lot of cons, but they exist, and most of them are just facts that we have to accept and plan ahead for.
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