How to Handle Past Due Payments

One of the most frustrating issues I’ve faced in my business is when a client doesn’t pay. It’s bad enough when they don’t pay on time and you have to spend valuable time politely chasing customers up. It’s even more annoying when you’ve provided the services and then the client ghosts your attempts at communication! Obviously, late payments can cause cash flow problems and create a strain on business finances, so it’s critical that you set up procedures to help minimize this payment problem and then how to cope when things go badly. This blog post covers some steps on how to deal with late client payments, both before and after your business provides its services.

First, there are steps you can and should take in setting up your customer service flow that can mitigate much of the risk of late payments. If you provide a service, these steps are the most crucial (customers are used to paying upfront for a physical good):

· Get payment upfront! This seems so obvious but so many small businesses worry that customers will not agree or that they will get scared away. Until you set up this procedure and communicate it to clients, you will never know! When we transitioned to upfront payment, 100% of our existing clients acquiesced. We started using a system for onboarding new clients, enlisting a third party to collect payments. The system forced upfront payment as a necessary part of our service provision. Our payment issues fell dramatically (though not by 100%).

· Get a signed contract! Contracts involve legal work and signatures, and both feel like a hassle. But a small investment upfront to make a generic contract is so worth it. I discuss these contracts in detail in my course offering, but as a start you can search for online examples. Your best bet is to hire a lawyer for 1-2 hours to draw up a contract that you can adapt easily to a variety of clients, services, and pay points. When onboarding the new client, you will have them sign the contract that includes explicit payment terms. It is SO important to have a legal leg to stand on if any payment issues arise.

· Be clear on payment terms, including when it’s due, any late charges that may incur, etc.

· Get multiple ways to reach the client, including email, physical address and phone. Get these upfront before you provide any goods or services.

Even when you follow these steps, you can still run into payment problems. Let’s say you have offer a payment plan; your client could pay the first installment but not the rest. Or, maybe you have a performance fee that is payable after delivery; we have had clients “disappear” once that fee is due. Here are the steps to take.

Step 1: Contact the Customer.

Hopefully you’ve already done this, but now is the time to escalate how and when you reach out to the client. When contacting the customer, it’s important to be polite and professional. Start by reminding them about the payment that’s due and ask them when they plan to make the payment. If the customer is experiencing financial difficulties, you may need to work out a payment plan that suits both parties. I do this when the client is one week late.

Step 2: Follow up with a Stern Written Reminder

If the customer doesn’t respond to your initial contact, it’s important to follow up with a stern written reminder. This can be in the form of an email or letter (or both). Use every communication method you have, including calling the business itself if it has a brick and mortar shop. In the reminder, you should reiterate the payment terms and due date and ask the customer to make the payment as soon as possible. You can also mention the consequences of not paying on time, such as late fees or legal action. I send this strongly worded letter when the payment is over two weeks late. I find that once I politely threaten legal action I get about 50% of clients to pay.

Step 3: Seek Legal Advice or contact a Collections Agency

If all attempts to collect the payment fail, it may be time to seek legal advice. Depending on the amount owed, you may need to file a claim in small claims court or hire a collections agency. A collections agency can help you collect the debt and may charge a fee for their services. Filing a claim in small claims court can also be effective, but it can be time-consuming and expensive. So, evaluate the cost of pursuing these claims against the size of the claim (the money the client owes you). Collections agencies charge 30-50% of the amount due, but they can be very effective. You can look up some agencies near you via online search. I think that once the client is a month late, and if they owe you over $200, you might as well turn them to collections (if you have a contract or proof of money owed).

Pursuing past due claims is emotionally stressful and takes away time from your core business. If you spend a little time upfront to help mitigate the issues, create generic letters, and engage a reputable collections agency, you’ll have an easier time of this situation. Once you’ve handled 1-2 past due payment issues, take some time to reflect on the experience and see what you can learn from it. Evaluate your payment terms and consider whether they’re clear and easy to understand. Look for ways to streamline your invoicing process and make it easier for customers to pay on time. Finally, consider whether the customer is worth keeping and whether you want to continue doing business with them in the future.