6 Proven Strategies for When Clients Don't Pay
You're psyched! You just landed a new client who is going to keep you busy with projects. Life is good.
You love the people, you're really enjoying the work, things are going great. Everything proceeds along smoothly for several months until that fateful month where you submit a large invoice and payment isn't immediate.
"No problem" you think. "Things are somewhat tight. It will just be paid a little late."
What are your options when a client doesn't - or can't - pay you?
There are several things you can do when a client doesn't pay you. Before you start down the path however, you need to think about what type of future, if any, you want with this client.
1. Gentle reminder.
Your invoice could have been forgotten, misplaced or buried in a pile on your client's desk. If they have gone past your due date, email - or call depending on what is most comfortable for you - a gentle reminder asking them the status of payment.
If you use QuickBooks or QuickBooks Online, you can also email a statement directly from the system.
2. Be personal.
If you've reminded the client and no payment has come, it is time for either another email or a phone call. Your client may tell you that he is very busy and apologizes that he "forgot" again.
Explain that cash flow is very important to your small business and that you can not afford to carry the unpaid invoice any longer.
Always remember to make it easy for your client to pay you. Tell him that you are happy to be paid via wire, PayPal, credit card - offer him all the options and be sure that you have more than just "send a check" available. Make it as easy as possible!
3. Be the "squeaky wheel".
If your client is having his own cash flow issues, he may need to make hard choices about who gets paid when. Send an email reminder or statement every other day or every week - take your comfort level and go one step further.
By being the "squeaky wheel", you insure that you are at the forefront of his mind when he is paying bills.
4. Cut him off.
As hard as it is, sometimes you need to tell the client - even though you've become friends - that you can not do any additional work until your invoices are paid in full.
As a small business owner, you are responsible for the running of your business and, as a result, there are times when you need to make tough decisions that are best for your business. You can't afford to work without compensation and your client should understand that.
5. Get tough.
You've tried being gentle. You've tried being personal. And you've squeaked so many times that you're tired of hearing your own voice. Now it's time to put that prepaid legal plan to use!
Have your attorney send a formal letter stating that if you are not paid, in full, within X number of days, that you will either take the client to small claims court (the normal limit is between $2,000 and $7,500 - it varies by state in the U.S.) or to arbitration. Whether you sue or go to arbitration depends on the contract you have with your client as some state that disputes will be arbitrated.
6. Bigger than small claims.
If the client owes you substantially more than the small claims process will allow you to sue for, you may wish to sue in a formal state trial court. Debt collection cases are usually simple and few collection cases actually make it to trial as most defendants either settle before trial or fail to show up for court (in which case you would receive a default judgment).
Chances are if you threaten legal action, your client will pay up. If he doesn't, you may have to follow through on your threat. Just remember to make this decision taking into account how much you are owed, your time for the legal action and whether or not you ever wish to work with this client in the future.
Note that if the client never pays you, you *may* be able to deduct the amount as a "bad debt". See your tax advisor for more information regarding the bad debt rule.
You want to take collection actions that you are comfortable with while thinking about how they will affect your future relationship with the client. Keep in mind however that you are a small business owner and should be promptly paid for services rendered and accepted. After all, you didn't go into business for yourself to work for free!
