Many business owners have suffered the misfortune of a client who won’t pay their bills. Sometimes the reason for the lack of payment is simply that the client forgot, or is short of funds, and most cases are resolved favourably.
But what if you’ve taken all the “friendly” options, i.e. phone call reminder, email reminder attaching another copy of the invoice, offered a payment plan, but still the client does not pay?
As we tally up our revenues and expenses (and write-offs, if applicable) for the end of the financial year, I thought it might be worthwhile exploring this topic today.
Please note that the information in this article is general in nature and should not be construed as legal advice in any way. You should consider your personal circumstances and consult a legal professional if you have any questions or concerns.
1. Make sure you’ve delivered the service you promised
You want to make sure you’re above reproach. The last thing you want is the client turning around and slapping you with a claim that you have not (fully) provided the services for which you’re seeking payment.
Ensure you have documented evidence that the service you delivered matches what was initially agreed with the client. That’s why having signed client contracts and/or service level agreements before you start working is a good idea, because they detail what you’ll deliver, how often, by when and in what format. Another option is the Statement of Work, which is roughly the same as a service level agreement but is more relevant for one-off projects.
2. Issue a letter of demand
So you’re sure that you’ve met your end of the bargain and you’ve tried to get payment amicably. Client is still not paying up. The Law Society of NSW suggests your next course of action is to send a letter of demand.
“A letter of demand alleges that they owe a debt and advises that if it’s not paid within a certain period of time (usually 14 days), you’ll begin legal action.”
Often just receiving one of these is enough to make someone pay.
The letter of demand should be truthful and specify the action you will take if payment is not received within the specified time. So don’t write that you will take legal action unless you actually intend to take legal action.
3. Take legal action
Whilst this is always an option, I’d suggest that you consider very seriously whether you want to go down this route. The decision to proceed should be based on a cost benefit analysis. Does the amount of money owed justify the time and costs associated with battling out the case?
It’s also worth noting the toll that legal proceedings may take on the rest of your business, your ability to service other clients and may impact negatively on your reputation, even if you think you’re in the right.
4. Just write off the debt
Sometimes it’s just better to let go and walk away. This is particularly true if the amount owed is small or if the client becomes very argumentative and toxic. At the end of the day, we are attempting to run our businesses and that kind of disruption can do more damage than good.
5. For next time, take preventive measures
I already mentioned having a client agreement or Statement of Work in place before starting work. Some other preventive measures are:
- Providing the client with your Terms and Conditions (T&Cs) before you begin work, which should clearly set out payment terms and what process you will follow if they do not pay on time.
- Charge a deposit before you begin any work and/or charge fees by instalment, and not all at the end of the project. Doing this acts as an insurance policy because you are getting paid along the way and you can delay/pause the project if the client does not pay an instalment on time.
- Charge late payment fees. These should be detailed in your T&Cs and the client informed prior to commencing work. You can’t just spring late payment fees on a client after the fact. I charge 10% interest per annum (based on the invoice amount, calculated daily and charged weekly until the invoice plus the late payment fees are paid in full). Sometimes if a client sees weekly invoices with an increasing balance, this prompts them to make payment or call you to negotiate a payment plan.
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Non-payment by clients is a potential issue faced by most businesses. It can be really unsettling and may have a serious impact on your cashflow, your sanity and your business’ reputation. But with some simple preventative actions and keeping your head when it happens, you just might walk away unscathed.
Have you been in this situation before? How did you handle it? Did you take legal action and were you successful? I’d love to hear about your experiences. Let me know by writing in the comments below.
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* Image sourced from RGBstock.com.
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About the Author: Angeline Zaghloul is an expert in business strategy, client management and business processes, and is the Principal of Peer Business Consulting, a Sydney-based consultancy providing strategy and operations support to startups and SMEs. Angeline also publishes a regular blog which provides research, advice and tips on key issues facing businesses.