In our last blog post we talked about how to make sure you get paid even after you fire a client. For the most part we focused on what happens when you terminate the relationship because they are no longer a good fit for your company. Another common reason for termination is that the client has not been paying you, or has not been paying you on time.
- Investigate before accepting a client. When you work for a client before receiving payment, that client is borrowing capital from you. You wouldn’t loan money to a company without doing due diligence, why do you loan your capital to them? Running a credit report before accepting a client’s business can be a fairly low cost way to save your company money and trouble.
- Ask for money when money is due. If you’re at the point where you’re ready to fire a client for nonpayment, then you’ve probably already let a few invoices slide. If an invoice is even one day late, it’s ok to call about payment. When you let a company pay you late, you teach them that it’s ok to pay you late. Obviously, you don’t want to be rude or threaten legal action immediately, but you also don’t want to get too far down the road of nonpayment. New client relationships can be tricky and it’s always a little uncomfortable to bring up issues such as late payment, but once an invoice is 90 days late there is a 26% chance that the invoice will never get paid.
- Know the red flags that a company is in trouble. Sometimes a company gets in over their head and starts to lose the ability to pay. No matter how long you’ve worked with a client, if they are suddenly late on payments and also seem to be experiencing high turnover or other changes in their business, it may be a sign to cut ties sooner rather than later.
No matter how good a company’s credit or how much you want the work, it’s still important to make sure that you have protections for nonpayment in place in your contract. Our free handbook on Credit Applications can help you create these protections. In general, you will want to specify items such as interest, collection fees, and attorney fees in the case of nonpayment. You will also want to have an acceleration clause that specifies all remaining payments for the full term of the contract are immediately due in the event you terminate for nonpayment.
Often when a client is late paying, vendors simply hope for the best. Service providers frequently don’t want to press the issue for fear they might lose future work. Sometimes vendors even feel guilty about pursuing payment. But, there’s nothing to feel guilty about and future work from someone who doesn’t pay you isn’t future work. It’s a loan that might never get paid and puts your own business at risk.
Firing a non-paying client is sometimes a necessary step. When you do so, you need to be prepared to move quickly to recover any unpaid invoices. The longer you wait to collect money, the less likely you are to get it. By the time an invoice is seven months late there is a less than 50% chance that you will ever be paid.
Most collection agencies only get paid if they can collect for you so if you have a late account, the sooner you turn it over to a reputable commercial collection agency the better.