Contract Terms that Stop Payment Problems
As with almost any problem, the best way to stop debt collection problems is before they start. The second-best solution is to identify a problem early. Business owners are often unsure about when to turn a client over to a collection agency. Unfortunately, studies show that after seven months, the chance of collecting on a claim goes down by 50%, this makes it essential to act on any unpaid bills quickly.
Including late fees and interest terms in your contract is a great way to not only ensure that you are paid in a timely manner, but also that you can identify which accounts are problematic early on. Late fees and interest terms can also help you recoup some of the money you lose from late payments. When a client is late paying you, it almost always costs you money. That money could be because you defer making a payment of your own and you have to pay interest, or because you put off making a necessary hire or improvement to your equipment, or simply because you have to spend time chasing down the payment and sending multiple reminders.
Including both the payment terms (15 days net, 30 days net, or whatever is reasonable in your situation) and the phrase, “Accounts not paid within terms are subject to a ___% monthly finance charge” can go a long way towards ensuring that your clients pay you on time. You may also choose to offer an incentive for paying early. For example, you could offer clients who pay their invoice within 20 days a different price than those who pay within 30 days.
Having late fees, or incentives for paying early, included in your contract will make it clearer to you if a client is having trouble paying a bill. After all, very few people will willingly pay more than they have to for a service. If a client is paying 1.5% more every 30 days he is late with his payment, and he is already 30 days late, it should be clear that he is having trouble paying his bill. It is important to note that some states restrict the amount of late fees you can charge. Make sure to research this amount for both your state, and if necessary, the state in which your client is located.
Although we always recommend that you reach out to clients as soon as their payment is overdue, you may come across a situation where it make senses for you to waive the late fee. Perhaps you fear the late fee will damage a good client relationship, or there have been complications that explain why the payment is late. That’s perfectly acceptable. However, having a paper trail that documents that your client is responsible for late fees can help you, or a collection agency, collect on the initial amount owed. Simply put, the late fees can provide more leverage for you.
At The Kaplan Group we hope that all of your clients pay you early or on time, but if they don’t, we’re here to help.
About The Author:
Dean Kaplan is Principal at The Kaplan Group. Dean's expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.