Collecting Unpaid Invoices: Tips for Business Owners
It’s a common problem: A client refuses to pay when the invoice arrives. Whether he has legitimate reasons or he's scamming you, there are steps you can take to minimize losses.
All business owners are bound to come across one sooner or later: the client who doesn’t pay on time — or at all. Experts agree that the best way to deal with unpaid invoices is to protect yourself from the outset. Before taking on any new clients, there are several things you really need to consider.
Preventing Unpaid Invoices Before They Happen
First and foremost, it’s important to run thorough credit checks on anyone you plan to do business with. “Just because a potential customer seems happy with your up-front terms, it doesn’t mean there are no skeletons in his financial closet,” says financial adviser Brendan Trudden. You can do individual checks through the three major national credit-reporting agencies — Equifax, Experian, and TransUnion. If any red flags appear, you’ll want to investigate further.
Sit down with prospective clients and clearly explain your prices, fees, and payment requirements. “Put everything in writing,” Trudden says. This should also include details of your ownership rights and intellectual property, if any, and all of your work orders.
If you work on retainer or under contract, clearly state what goods or services are covered and what will incur additional fees. You may want to have an attorney create a general agreement that conveys all of this and that is flexible enough to be used with all of your clients.
Let potential customers know how often you’ll bill them and how long they will have to make payments. This, too, should be in writing. Based on his experience, architectural design firm owner Jeffrey Graynor advises that you “stress that it is not a personal issue, but rather something you require of every client because you simply can’t run your business effectively without receiving timely compensation for your work.”
Keep Your Clients and Employees Up to Speed
Always keep on top of accounts receivable and send out invoices promptly. Also make sure that invoices are easily distinguishable from the barrage of other mail your clients probably receive. “We stamp messages like ‘statement enclosed’ very clearly on the envelopes so they’re less likely to be pushed aside or tossed out,” Graynor says. Send reminder notices to any client who doesn’t pay within a predetermined time frame (anywhere from 10 to 30 days). These should also be clearly marked.
If a client still doesn’t pay the invoice, have your accounts receivable department or a designated employee give him a call.
Having a third party handle payment issues will make it easier for you to maintain a good working relationship with your clients, Trudden says.
The person who does make the call, however, should not scold the client for nonpayment. Ask if there’s a problem, and if there’s anything your company can do to help.
Tips for Collecting Unpaid Invoices
1. Modify Payment Terms
If a client is having financial trouble and not paying you, you may want to offer him a more flexible payment schedule. While having to do this can be frustrating, it is a good way to recoup some of the money he owes you without damaging your relationship. After all, he may just be having a temporary setback.
2. When to Use a Collection Agency
Still having trouble collecting an unpaid invoice? It may be time to hire a professional collection agency. But before you do, Graynor suggests that you confer with your financial adviser or accountant and contact the Better Business Bureau to check that there are no complaints against the agency you select. “Remember, they will be representing your business, and unprofessional tactics can have an impact on your reputation,” he says.
“You can also get yourself into legal hot water by making threats, using harassing or abusive language, making collection calls at odd hours or too often, or making false statements about what will happen if the debtor doesn’t pay,” Trudden cautions. It’s worth your while to familiarize yourself with the Federal Trade Commission’s Fair Debt Collection Practices Act.
3. Last Resort
Have your attorney send a formal letter stating that if the client doesn’t pay you in full within a certain time frame, you’ll have to take him to small claims court or arbitration. The normal claim limit here is between $2,000 and $7,500, depending on the state in which you do business. If you threaten legal action, the client will usually pay up.
But if he doesn’t, you may have to follow through with your threat. Before you do, consider the amount you’re owed, how much time it will take to get it, and whether you want to work with this client in the future. In most small claims cases, you can present your own case and avoid charges associated with an attorney.
If a client owes significantly more than the small claims process allows, you may want to sue in a formal state trial court. Debt collection cases are usually simple because few actually make it to trial. Most defendants either settle beforehand or fail to show up in court, in which case you receive a default judgment.
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