By Trace Reddick, MBA,
You work hard to grow your business. You put in the time and effort to find people who want your goods or services and then getting your product in their hands. That alone is a huge hurdle. It’s the reason that 90% of businesses fail in the first year. They simply are not earning enough business. So if you have managed to weather the storm and reach your customers, you shouldn’t have to badger them to pay. That’s how things should run, but life doesn’t run always work out. There will be times when you need to take action to get paid by your customers.
To help you on your journey here’s five different ways to collect from customers who won’t pay.
1. Properly communicate
People forget things, even important things. They may have forgotten that they owe you money. The first step is reaching out to them and letting them know about the situation. If they are unresponsive, continue with your reminders and look for other ways to contact them. Phone numbers and emails work great. If there are other people to contact, start involving them. If you’re in the same geographic area, stop by the physical location.
The key is to be firm but gentle. You need to put yourself in their shoes still and try to figure out why this is happening. Try to empathize with them as much as possible. Don’t threaten them at any point. It isn’t going to get you what you want.
If it’s an individual, it may be awkward, but approaching another family member might solve the problem. You may not have been dealing with the family member who handles the money.
If it’s a business, start talking to other members of the team. You don’t necessarily have to go over their heads. The most useful person to reach is someone in the billing office. Going directly to the source will let the problem get handled faster.
2. Have an attorney send a certified demand letter
When they are in default for an extended amount of time, and simple communication doesn’t seem to be solving the problem, the next step is legal action. Your attorney can draft up a certified demand letter. This is a letter that is sent by certified mail that demands payment for the goods and services provided by you. The letter states:
- why you are claiming the payment
- whether they should pay you in full or overtime
- directions for them to reply
- a deadline for them to repay
The letter is not a threat in and of itself, but it is showing that you are serious. The letter will usually indicate that if they don’t follow the letter, the next time you contact them will be through official legal proceedings. Often making the jump from simple phone calls to full legal action is enough to jump-start movement and get you paid.
In our experience at Dorado Finance this method works almost every time.
3. Collection agency
You can hire a collection agency to collect the debt for you. They will handle the entire process until you get what you are owed. The agency makes its money by taking a cut of what you end up collecting, usually 25-30%. They also might not end up collecting the entire sum, so weigh the benefits first before you go this route.
You can also hire an agency to do factoring, where they will buy the debt from you at a percentage of what the invoice is worth, usually 75%. There can be other fees added on to that, so read the fine print before considering this option.
Arbitration is where you and the customer sit down and try to come to a legal understanding. It can be fast and cheap compared to the municipal court. It is less formal than going to court, and you will be overseen by an arbitrator instead of a judge. Their judgment can be legally enforced, just like a judge’s can. You can add a clause into your contract about arbitration, stating if it will be mandatory or mutually agreed upon.
5. Take them to court
If all else fails, it’s time to take drastic legal action. If the sum owed is small enough, you can settle things in small claims court. The advantage of that is that the process moves quickly, and you don’t need to be defended by an attorney. You get to save on legal fees, but you do have to defend yourself. Get all your paperwork in order that proves what you are owed and that the products and services have been rendered as per your end of the deal. If the other party doesn’t show up in court, as often happens, you also win by default. The limit to how much you can claim in this court varies by state but is usually between $2,000 and $25,000.
For larger cases, you will have to sue them in superior court. You will need to be defended by an attorney and the costs grow from there. If you win, the legal fees should be paid by the other person. However, if they don’t have any money, a job to garnish wages, or assets to put a lien on, then your still not going to get paid.
How to prevent this from happening
Think out beforehand what you are going to do to make sure you will be paid on time.
- Don’t allow access to your product until clients have paid or have proof of their ability to pay.
- At the beginning of the business relationship, make sure that you identify the correct person responsible for making the payments. Account managers are not usually thinking about this type of thing. Accounts Payables managers are.
- Start charging late fees, and let them know upfront what these fees are verbally and by adding language to your master service agreement.
- Ask for the payments early and in installments. If they have to pay most of the money by the time the service is rendered, they will likely pay the rest.
- If non-payment becomes a chronic issue consider making them pay a deposit upfront or just stop doing business with them. It’s OK to fire clients.
- Have them supply you with multiple possibilities to pay you before starting.
- Have your contract or invoice in order to make sure you are covered legally.
So there you have it, five different ways to help collect the money you’re owed. Keep in mind to try to keep your emotions out of the situation. Escalating frustration isn’t going to fix your problems.