If your a freelancers, independent contractors or business owners there’s an unfortunate question you may need to ask yourself at some point: What can I do when a client won’t pay an invoice?
Protecting yourself in the first place with contracts and written communication is the best line of defense. And if that doesn’t work, it’s time to take action.
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To protect yourself and your business when a client won’t pay an invoice, start every job with a signed contract. This serves as a binding agreement between you and your customer. It spells out the exact duties of each party — yours as the service provider and theirs as the recipient.
Your contract should include:
You can find sample customer contract templates online, or you can write your own.
If you’re working with customers regularly, it may be worth it to consult with a lawyer to write a legal contract to suit your business needs.
Unfortunately, late payments from clients seems to be the norm. According to a survey by B2B payments company Melio, 59% of small businesses have direct experience with late payments, with 25% waiting 20-30 days past the payment due date.
Late payments or non-payment tend to happen for three main reasons:
While some non-paying clients will bail on their bills, some clients simply require motivation with an overdue payment letter. Either way, a business owner needs to plan accordingly. So what can you do?
As the old saying goes, “An ounce of prevention is worth a pound of cure.” A little effort up front can be a good investment.
Clearly state your payment terms before working with new clients, such as whether they’re 30 days net, due upon receipt, etc.
Include a policy on late fees or penalties to deter missed payments or unpaid invoices.
Some clients respond better to positive reinforcement than negative. Offer a small discount to those who pay within a certain period of time (e.g., three days from invoice issuance) or who pay in cash.
Keep track of your business income, and don’t budget down to your very last cent.
A business owner should track and manage cash flow. Prepare for the possibility that some customers may be late or try to stiff you. Don’t count all of their money before it’s in hand.
Accept that there will be times you simply won’t be able to collect payment. The bad faith of a couple of clients shouldn’t break the bank for you.
Operate assuming that your actual business income might be less than your combined billing.
If a client with cash flow issues has been transparent and communicative, offer payment installments or work out a deferment plan.
And if a client has had payment issues in the past, you might ask for payment or partial payment upfront before doing business with them again.
If all else fails, you can hire an accountant for assistance. They can help you implement better policies to protect your business and make suggestions for lowering your risks like security checks and tighter credit requirements.
Some might even do collections for you. Plus, an accountant will be able to spot potential tax savings.
No business owner wants the time-consuming task of emails and phone calls to chase down money. There are several steps you can take for a client who won’t pay:
Send a friendly email reminder to a customer for payment. Be clear and calm, courteous but firm.
Outline the facts stating your work, when full payment was due, and mention the full amount. Include a copy of the signed contract.
Feel free to send such an email more than once, and follow up with a call. Wait a few days in between emails to give them time to respond.
As the weeks pass, escalate your request by sending the invoice to your customer’s boss or manager. Keep sending the payment request up the ladder at the offending organization
If you don’t receive a response from the email, work with a lawyer to send an official payment request letter to the client who refuses to pay. This can be an effective tactic.
Note that this approach will likely end your working relationship with the client. Keep that in mind before moving forward.
If neither of these methods works, legal action could be your best recourse.
If you have a signed contract and you’ve delivered on it, you could have a good case.
If you don’t have a signed contract but you have strong proof of intent — like a long line of emails in which you discuss terms — you may also have a case.
You may be angry, but you need to consider if the legal process is worth your while. The hassle of small claims court may not be worth your time.
Delinquent accounts can take a toll on your business. If you have several clients past due, it may be helpful to have professional debt collectors help you prevent further loss.
Compare the cost of the debt collector against what you’re owed, and evaluate if it’s worth the expense. If it’s not a lot of money, sometimes it’s better to simply let it go and get on with finding new business.
While business insurance can’t magically get your outstanding invoices paid, it can protect your businesses from other financial losses — including some legal costs.
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