Small-business owners have to constantly worry about finding clients, marketing, paying employees, and scaling their businesses. Add to that one major enemy that ruins their cash flow and business plans: unpaid invoices and time spent collecting debts owed by delinquent or uncooperative clients. So how can small-business owners deal with debt collection?
Business and spiritual self-worth coach Abiola Abrams has a stack of unpaid invoices totaling close to $4,000 from Mode Media, which abruptly shut its doors in 2016. To date, she hasn’t seen one penny.
“I have not recouped anything,” she says, “and I have heard the same from many others who were in the same position.”
I can commiserate. Since the first quarter of this year, I’ve had two invoices go over 120 days past due — one for freelance writing and the other for a shipment of books.
Unfortunately, our stories are behind some glaring statistics. The total amount in unpaid invoices across all U.S. small businesses is approximately $825 billion, according to a study conducted by Fundbox.
As if having to self-fund your retirement and find your own healthcare plan weren’t already enough to contend with, self-employed individuals have to deal with waiting for vendors that take 90 days to pay them only after countless reminders or tracking down money for jobs that are already completed — often with little recourse.
But if you find yourself in a similar situation, or maybe you just want to play defense, here are 14 steps to increase the chances that you’ll be paid in full and on time with every invoice you submit — as well as some small-business debt collection guidelines for those times when invoices go unpaid:
What to Do Before You Agree to a Project
1. Do Your Research
Hearing about other freelancer and small business owner experiences with the business in question can help you format your own strategy and ensure timely payment — or decide whether it’s best to avoid the business entirely.
2. Create a Well-Written Contract That Lays Out All Your Expectations
You can create a lot of problems for yourself if you don’t have a signed agreement with your client. If clients aren’t willing to comply with the provisions within the contract, that may be a red flag. If they do have objections, decide if they are acceptable risks or deal breakers for you.
The best way to avoid being ghosted is to put a contract in place before you do any work.
I recommend having a lawyer help with the wording. But if you can't afford legal advice, draw up a contract yourself. I'm not a lawyer, but I know that to protect yourself, there are certain things you should include.
- Payment schedules, deposits, and payment milestones
- Compensation for adjustments or modifications
- Deadlines for service
- Ramifications for late payment
- Clauses for legal fees
- Guidelines for the premature termination of a project
- Copyright and intellectual-property ownership
3. Statement of Work
Describe the exact work that you will be doing, such as “five blog posts of 1,500 words each on the following topics” or “designing a WordPress website.”
4. Be Clear About Your Rates
Beginning freelancers — and even some with years of experience — have trouble determining their rates. Should you charge per article or per word? Should you include costs for communication?
Make sure to specify your rates, what a late fee will cost, charges for doing research or writing more than one or two drafts (if you’re a writer), among other details that pertain to your situation.
5. Define the Contract’s Expiration
If the expectation is that the contract will be ongoing, start with a term of six months and then revisit the contract if you need to make changes. You may decide to stop working with that client, or you or the client may want to change the scope of your work.
6. Determine Ownership
If you are creating material for a client, decide ahead of time who owns the final product, including whether you have the ability to use the material for your own marketing. Then put your decision in writing.
7. Agree on a Timetable
When are you expected to provide a first draft? If your client requests numerous changes, at what point will they be required to pay more? What hours of the day are you available to handle client requests?
Determining what the schedule of the project will look like in terms of the day-to-day can help alleviate the headache of a panicked midnight phone call from your client, and will help you maintain your work-life balance. If their emergency becomes yours, decide if that costs more. Otherwise you could end up with a lot of last-minute requests.
Additionally, include in your contract that you are to receive some of your payment partway into your work — while not every client may agree with this payment schedule, it can act as an insurance against the possibility of not being paid at all. Plus it demonstrates that both you and the client have skin in the game to get the project done.
“In my experience, customers that pay a down payment are more likely to pay the remaining balance,” says marketing consultant Jacob Landis-Eigsti. “For smaller projects, sometimes I’ll require payment in advance. You need to have a strong reputation to make this work, however.”
8. Agree on Termination
Should one of you need to terminate the contract, specify on what grounds (if any) that is permissible and that payment for all work up to that point is still required by a certain number of days following the termination.
9. Make Payment Easy
Offer to receive payment in a number of ways. In addition to receiving payments via credit card, opt to receive payments via PayPal, Stripe, checks, or Automated Clearing House. If your client uses mobile payment applications (such as Zelle, Venmo, or CashApp), offer to accept payment through those methods as well.
Small-Business Debt Collection Once Invoices Go Unpaid
1. Follow Up With Friendly Emails and Phone Calls
Whether you use a service that automates the collections process for your business or you do so manually, make sure that you follow up politely, but persistently. In your email correspondence, remind them of the signed contract and your desire to bring the account up-to-date as soon as possible.
Keeping communication open and professional makes it easy for delinquent clients to save face and provide an explanation for the late payment, especially if you’ve established a long-standing relationship with the client and they’ve honored invoices in the past.
It also makes it more possible to create payment plans or schedule an in-person meeting to collect payment or negotiate the outstanding balance if it becomes clear that the client is cash-strapped, but wants to honor their debt as much as they can without involving courts and producing business acrimony.
2. Keep Following Up, Even When They Won’t
In the event that a client won’t set up a payment plan, let alone respond to your emails, you can determine if your client has read your email using software like HubSpot and MailTracker. This can provide peace of mind that your emails are going through, and that the onus of this transaction now rests with them. It’s also evidence that for whatever reason, they are not responding to your payment requests.
If you haven’t heard back from your client by the deadline you set, try sending the email again each Monday for the next three weeks.
After that, if there is still no response, send your invoices at the 60- and 90-day mark.
The point is to make sure that the client is getting your notices and to continue bothering him until he takes action. If you still haven’t received anything after three months, threaten legal action. A simple threat sometimes encourages somebody to follow through on payment.
3. Sue in Small Claims Court
Small claims court is a state-level court that resolves disputes involving relatively small amounts of money. The amounts usually range between $1,000 and $7,500, depending on the state. If the client fails to show up to court, you win the case by default.
If the client loses the case and fails to pay the judgment, you can employ traditional small-business debt-collection techniques, which include property liens and wage garnishment.
Keep in mind, this is all if things go smoothly and you successfully represent yourself, as many individuals do in small claims court. Otherwise, the amount of time and effort expounded may end up exceeding the payment amount.
“The biggest risk with going to small claims court over an unpaid invoice is the likelihood that your court costs and legal fees will be higher than the amount owed,” says former start-up lawyer and business finance expert Priyanka Prakash of Fundera. “Depending on the city, your case filing and processing fees could be as high as $300.”
“Plus it will generally take 30 to 60 days after filing your complaint to get a court date — and enforcing on the judgment can take months,” Prakash adds.
4. Hire a Collections Agency
Most companies send accounts to a collection agency when they’re over 90 days due.
If you go this route, there are more than 5,000 collection agencies to choose from in the U.S. Make sure to choose an agency that has a track record of success using ethical, legal tactics to recoup money. A quick search of the Better Business Bureau (BBB) or the Association of Credit and Collections Professionals can facilitate this process.
Keep in mind that by employing a debt-collection agency, they in turn represent your business and ethics by proxy.
“Remember that the debt collectors you hire work for you, and their collection methods will reflect on your business,” says certified public accountant Rob Stephens, founder of business solution site CFO Perspective. “Make sure you understand their collection methods and shop around for a company that matches how you want these customers to be treated.”
You should also make sure that you’re clear on the collection agency’s terms of payment. Some debt collection agencies don’t charge a fee until they recoup payment.
Others require a percentage of whatever amount recouped, even if they weren’t able to secure 100 percent of the outstanding payment. For example, let’s say that the collection agency charges a 30 percent contingency fee on any amount recouped. If they secure $60 from a $100 invoice, you will walk away with $42 while they pocket $18.
5. Work With an Attorney
Small-business debt collection can be tricky to navigate on your own. Hiring a lawyer who specializes in breach-of-contract cases can help.
Retaining a lawyer will cost you money upfront, so make sure that the cost of contracting a lawyer doesn’t further limit your cash flow. You can also hire an attorney to draft a demand letter. This is a formal request for the client to either make a payment or set a timeline within which they will make said payment. Demand letters sent by an attorney may be more effective at getting a client’s attention.
6. Write Off the Loss and Move On
After you’ve fought the good fight and still haven't received anything, you may have to accept that you’re never going to see that money. During this time you should report the enterprise or individual in question to the BBB to pay it forward to your fellow freelancers and solopreneurs.
A Final Thought on Small-Business Debt Collection
Small businesses are a major part of our country’s fiscal backbone, but 64 percent of these small businesses are adversely affected by late payments or non-payments, according to another Fundbox study.
When small businesses go unpaid, there’s a huge impact on our economy. Small businesses use their revenue to buy equipment, hire new talent, pay for marketing and advertising, and increase inventory and salaries.
That’s why it’s imperative that we honor the contracts that we create with small businesses or solopreneurs — to ensure that these businesses are able to grow, thrive, and continue to provide the goods and services we want. And if your own business has been slighted, you’re well within your right to ensure you are paid fairly.
Additional reporting by Jessica Ozar.