You aren’t the IRS, but sometimes collecting money becomes an entrepreneur’s job. That’s why we asked 15 entrepreneurs from the Young Entrepreneur Council (YEC) what steps they take before going to a collections agency for customers who just won’t pay up.
1. Call daily
I had this issue with a deadbeat client. I called them daily and left voicemails. I did this to their main company, and both CEO and CFO on their mobile for a month. They ended up paying. It works! I was a little bit annoying but it was a lot of money. Collection agencies cost a bit, and if you can do the job yourself, it’s worth it.
2. Offer options
Oftentimes the delinquent isn’t avoiding payments simply to be nasty but more likely because they’re facing issues. Reach out to them and see if you can work something out such as a payment plan, perhaps. For example: X dollars/month over the next Y months. Or offer a good faith payment now and the rest in a while.
3. Reach out legally
Sending a letter from an attorney before resorting to collections has worked for us in the past.
This eliminates the need to use a collections agency and elicits a fast response.
4. Find out if it’s worth it
Collections companies can take up to 30 percent of the money collected (not owed). If you are owed $1000 and collect $700 of that through an agency, you will only end up with $490.
Knowing this, consider what it’s worth to you to use them. They will save you time and heartache, but they will take their cut for it and sever any possibility of getting paid directly in an amicable way.
5. Exhaust all other options
It can be uncomfortable to call or email a client each day requesting payment. Circumstances get complicated and it’s often too humiliating for a client to share their situation.
Always approach with empathy and understanding. It takes less emotional energy to assume the best and persist. If all else fails, be sure your client contract is sufficient to enlist a reputable collections agency.
6. Have a brief consultation with a lawyer
I would recommend talking to a collections lawyer before resorting to an agency. It can be quite inexpensive to have a lawyer draft a demand letter, which might scare your delinquent client into paying without resorting to the exorbitant percentages taken by collections agencies.
7. Know when to cut your losses
Take every necessary effort to collect your payment from the client yourself, but if worse comes to worse, you might have to find an alternative or just drop it altogether.
One bad relationship can sour many others based on what they say, so you have to be careful (especially as a small business) to not create enemies even if you’re in the right. Sometimes you have to cut your losses.
8. Discount and settle up
A collections agency is most likely going to take a good percentage of the total amount owed. If you’re out of other options, you might as well offer that same percentage off to your client in order to settle the outstanding bill. With some luck, the client will take the discount and you won’t have to go to the trouble of using a collections agency. Net result? Money in your pocket sooner.
9. Set up a process to protect your receivables
I’ve been here before and what I realized is that hiring a professional collections agency is really a last resort. Instead, you must set up a process for collecting receivables.
For instance, a courtesy letter should be sent to any client past due net 30. A harsher worded letter explaining penalties should go out past due net 60. After past due net 90, send out a letter from your lawyer.
10. Create a sense of mutual empathy
When an account has become seriously delinquent the first thing I do (and train our wholesale managers to do) is let the customer know that we know how easy it is to run into trouble as a small business and offer a payment plan. We let them know how their delinquent balance affects our business and remind them that like them, we also rely on the cash flow.
11. Start with email reminders
I’ve found that many times a late or non-payment can simply be chalked up to the client being busy. Nine times out of 10, a polite email reminder and phone call do the trick for me. If that doesn’t work, then you probably don’t want to work with them again anyway. If they are repeat offenders, think of all the stress that you can release by not having them in the picture.
12. Flip the roles
One method I use is to metaphorically flip the roles of yourself and your client to ponder such questions. What could be causing this late payment? If I were late paying bills, what would be the best way to collect? Many times just a simple letter to your client offering alternative methods of repayment can get the job done. Good luck!
13. Be flexible
Sticking to an unchangeable process when dealing with past due accounts is a recipe for complaints, frustration, and anger from your clients. If you calmly sympathize with them, offer to settle on a fair amount, and ask how you can prevent further billing issues, then you’ll receive payment, prevent an escalation of problems, and hopefully retain them as a client.
Try to figure out why they are not paying their bill. Are they dissatisfied with your work? Are they having cash flow issues? Once you have an idea of why they are not paying, offer an alternative such as a discount, payment plan or, if it’s a problem they have with the work you’ve done, offer to fix it. Using collection agencies should come as a last ditch effort. After all, you’ll only receive a small fraction of the original invoiced amount.
15. Consider the cost of collecting
Many business owners call lawyers, frustrated about past-due client debts. Lawyers will typically explain the process of collecting and the legal costs surrounding this process. Plus, even if you take all the proper/legal steps, you still may not be able to collect, if there are no assets or the only assets are protected under the law. So, before you collect, make sure the cost is worth the cash.
Have you got any advice of your own to share? How do you deal with clients that just won’t pay? Let us know in the comments below.