In point-of-sale businesses like restaurants, retail shops and online stores, customers pay for their purchases up front. The only way you won't get your money is if something goes wrong with your credit card processor. But if your business operates on an invoicing system, you'll generally need to give customers up to 30, 60 or even 90 days to send in their payments — and, perhaps unsurprisingly, some of them won't do it.
There are numerous reasons for a late payment or nonpayment: Perhaps the bill got lost in a pile of other papers (or, for email, in the customer's inbox), or the customer had an unexpected expense and couldn't afford to pay you by the due date. But regardless of the circumstances, an unpaid invoice can really hurt your business, and eventually you'll need to take action if you want to receive your money.
It might be tempting to call in a collection agency the moment the due date passes, but doing so right away might make the customer feel threatened and upset. You want to deal with the problem head-on, said Greg Waldorf, CEO of invoicing app Invoice2go, but being straightforward doesn't have to mean being aggressive. If a client or customer hasn't paid a bill on time, here are the steps you should take, in this order, to ensure that you not only get your payment, but also maintain a good relationship with the customer.
Collecting payments: steps to follow
Reach out to the customer. A friendly reminder that a customer's bill is past due is the first step in collecting your payment. Most of the time, a late payment was an honest mistake, and receiving that first follow-up will make a client pay as soon as possible. Waldorf noted that the subject of money isn't always easy to address, so you may want to ease into the topic.
"Use an opportunity to check in on a customer's satisfaction for your services, and then discuss any approaching or past-due invoices," Waldorf said.
Resend the invoice. In some cases, clients will try to delay payment by saying they lost the bill, or that they need to reconcile their records to find the correct payment amount, said Hunter Hoffmann, head of U.S. communications for small business insurer Hiscox. If this is the case, Hoffmann advised sending an updated invoice right away — even if you know the customer has the original — to take away this excuse.
Give an ultimatum. When a nonpaying client ignores your emails and calls about his or her invoice, demand payment a little more firmly. Service businesses working with the client on an ongoing basis are in the best position to give an ultimatum, Hoffmann said.
"Set a specific deadline when service will be cut off to light a fire under them," Hoffmann told Business News Daily. "It's amazing how quickly they can figure out how to pay when they realize how hard it will be to replace your service in a couple days."
Waldorf advised requesting a time line for payment and continuing to follow up until the customer pays. If necessary, resend your original contract, indicating that you will escalate the situation if invoices remain past due.
Hire a collection agency. If repeated attempts to contact the customer and collect your payment have failed, it's time to call in backup. A debt-collection agency is a company that specializes in recovering payments that are typically more than 90 days past due. The company will take the task of following up with the customer off of your hands, using tried-and-true tactics to get the individual to pay. This Business News Daily article contains more information on when and how to hire a collection agency.
File a lawsuit. For most small businesses, the time and money associated with suing a nonpaying client are not worth it. However, if that client owes you a large sum of money and refuses to pay you or a collection agency based on the terms of your contract or invoice, a lawsuit may be necessary. For example, Business Insider reported that public relations firm Agency 2.0 recently filed a suit against its former customer, an electronic bike maker that raised more than $5 million on Indiegogo with the firm's help, for not paying or acknowledging the agreed-upon 10 percent cut of its raised funds. If you do decide to pursue legal action, consult with an attorney to determine how to proceed.
What to do in the meantime
If you're strapped for cash and don't know when a customer will send his or her payment, a factoring service may be able help you get the money you need while you're waiting. With a factoring service, you sell your accounts receivable to a company for a certain percentage of the accounts' value (usually 70 to 90 percent), and that company will advance you most of that money within a few days. Then, it will collect your customers' payments and send the rest of the cash to you, minus the service fee.
It's important to keep in mind that factoring services are not collection agencies, and they will run a credit check on your customers before agreeing to purchase their invoices. If you use a factor for multiple customers' invoices, the service fees will add up, and you may end up losing money in the long run. To learn more about using a factoring service and how it differs from a collection agency, visit Business News Daily's guide.
Tips for ensuring on-time payments
You can never guarantee that every single customer will pay a bill on time, but there are things you can do to keep late or missed payments to a minimum in the future.
Discuss all costs and payment terms up front. Putting everything on the table right away not only sets payment expectations for your client, but also builds the trust necessary for a strong, positive customer relationship, Waldorf said. Before diving into a project, make sure that your client is fully aware of projected costs, and ensure that you take time to answer any questions up front.
"Having this clarity from the beginning will help strengthen customers' trust and commitment to paying the full amount," Waldorf said. "If anything changes along the way, alert your customers in real time so there aren't any surprises."
If a customer has a history of late payments, you may want to consider asking for a down payment, or allowing them to pay in installments, Waldorf said.
Send invoices right away. With so many tasks on your plate as a small business owner, it can be easy to lose track of a customer invoice. You may even to forget to send one in the first place, and going after a client for payment on a bill you never sent will only hurt your reputation. Waldorf advised sending your invoice as soon as a job is completed — and staying on top of it until it's closed out — to avoid falling behind.
Be persistent with late customers. If a customer won't answer electronic correspondences about his or her bill, Hoffmann said to call the individual — and keep calling every day until the customer pays.
"Don't be aggressive, just don't stop asking," Hoffmann said. "Emphasize that you want to settle up the accounts so you can both focus on more important things. It will become much easier for them to pay you than to keep dodging your calls and making excuses."