What to Do When Clients Don’t Pay

8 months.

That’s how long it took me to collect $810 from a client once.

I sent emails. I called them. They called me. I offered to meet them at their house. I sent multiple text messages and Paypal requests. Finally, after 8 months, I got a Paypal transfer from the client. The funniest thing of all? The client is actually incredibly wealthy and lives on oceanfront property.

You will rarely find someone who takes 8 months to pay. However, it is common for some of your clients to miss the due dates on their invoices. Some clients will forget. Some will procrastinate. Some don’t make your invoice a priority. Some just don’t have the cash.

No matter what the reason for a client not paying, the responsibility of collection is entirely yours (a pain, I know!). Here are some tips about what to do when clients don’t pay you.

 

1. Make your payment terms very clear.

Your invoices should always tell clients 4 things:

1. How much they owe.
2. When is payment due.
3. Where to send the check.
4. Other acceptable forms of payment.

Why do this? You should do this because it makes it clear how the client should pay you. In my invoices, for example, I put all the payment information in bright, bold boxes. Even if the client doesn’t pay immediately, they can just look at my invoice weeks later and be able to read the important info in 5 seconds.

 

2. Be patient with small-business and non-business clients.

Small businesses owners and regular people may not have yet developed an accounting cycle or have formal accounting procedures. Unlike medium and big businesses that have an accountant that is responsible for bills, a lot of small businesses owners will take care of their own bills and bookkeeping. For them, paying business bills and invoices is like paying their car registration or paying their taxes – sometimes, they will simply forget.

Why do this? You have to be patient because you want to preserve the business relationship. You should also try to be understanding because the owner does not necessarily have the same operational efficiency as a business that’s been in operating for 15 years. Sometimes they’ll forget that invoice at the bottom of their mail stack. Just remind them and be patient – this is all part of doing business. In the case of my 8-month late client, the client probably looked at my invoice and considered it insignificant, much like I would consider the $4.50 in library fines I have.

 

3. Remind them and don’t penalize them.

One thing about doing business is that business relationships are important. When a client of yours has a bill past due, a common practice is to charge interest on the balance or to charge a late penalty fee. This is a reasonable practice because the fault usually lies 100% with the client. However, you should know that this could insult or anger your client.

If you have a close relationship with your client, I would always recommend giving them a reminder call or email when their bill is past due.

Why do this? You should consider that you might insult your client by adding fees. Unlike a credit card company that will not hesitate to add a $25 penalty for late payments, you have probably talked with your client face-to-face and have forged a more intimate business relationship. More intimate business relationships require more discretion. Furthermore, reminders are helpful just in case mail got lost or there was some sort of other miscommunication.

 

4. Give an incentive to pay early.

Cash is king – there’s nothing more valuable than cash – not a promise to pay, not a verbal commitment, nothing. With that said, if you find yourself running short of cash consistently during the month or if you want money sooner than later, you can offer discounts for early payments.

2/10 net 30 is a type of term that can be found on many business-to-business invoices. The terms means that the contractor will give you a 2% discount of the amount due if the client can pay the balance within 10 days. Otherwise, the total amount is due 30 days from receiving the invoice.

Why do this?  2% discount is a lot. However, giving a discount so that you have more cash-on-hand might be worth the discount. Let me explain:

A typical business will have to pay salaries, rent, utilities, estimated taxes, suppliers, and other expenses throughout the month. If at anytime the business doesn’t have the cash to pay, they will need to take out a loan or run a line of credit. All those things come with interest and probably at a much higher rate than 2%. So, if they have cash-on-hand from clients’ early payments and they can avoid financing fees, then a 2% discount can make financial sense. Furthermore, a client that pays early means that you can mark the invoice as paid and not have to worry about it later in the month.

 

5. What can you do legally if they don’t pay?

If everything above I suggested doesn’t work, there are other steps to take.

1. Offer to negotiate payment.

If the client simply does not have the cash at the moment, you should try and work out a deal with him. Make the balance payable in 10 installments due at the end of every month. Extend the due date 6 months and tack on 3% to the balance. Take their waiting room leather sofa as payment. You run your business, so you can call the shots.

2. Sue them. Or threaten to sue them.

Unfortunately, some people just won’t care or take your invoice seriously. That’s when you’ll have to involve the law.

You’re more than likely going to take up the matter into small claims court (up to $5000 claims in Hawaii). Just head down to your court district, file the necessary papers, and give notification to the future defendant, your client. If you have the invoice, the contract, and emails, you should have an easy case.

Alternatively, you can always hire a lawyer to help you write up a letter with incomprehensible legal jargon that sounds threatening.

3. Hire a collection agency.

A collection agency usually makes their money by taking a % of the money collected. Hiring a collection agency is aggressive though – don’t expect your client to do business with you afterwards.

4. Write it off.

As a last resort, you can write it off as an expense.

Did you know that accountants for big companies have to estimate uncollectible accounts and factor them in when they make their yearly forecasts? It’s because they already know that a handful of people will simply not be paying or that the efforts required to collect payment from them would not be worth the money.

For example, if your client declared bankruptcy, you’ll have to file a claim in court and a judge will determine which claims will be paid. If you’re only looking for $200 though, this is definitely not worth your time.