How to Deal With Late or Non-Paying Customers

How to Initially Escalate

Small business owners, however, can take steps to not only collect unpaid invoices, or better yet, prevent them from happening in the first place. The first step in collecting unpaid invoices is early escalation (days 1-20 late), which usually starts out friendly and ends up with a phone call. This usually comes in three steps:

1. Days 5-10 past due - A friendly reminder. When an invoice is past due by a few days, small business owners may want tostart by sending a friendly, automated reminder either by mail or electronically. In this phase, the language should be courteous and professional.

“Dear valued customer, we've noticed that you have yet to pay invoice #123. This is just a friendly reminder to pay the invoice so that this matter can be resolved. We know how busy things can get, but could you please address the payment status and get back to us? Thank you.”

In this instance, the message is succinct in its meaning while telling the customer that their business is still valued.

2. Days 10-20 past due: - Make Demands. When the customer still hasn't paid, it may be time to use more forceful, yet still professional, language, still in the form of a physical or electronic mail message.

“Dear valued customer, per our previous note to you (sent on such-and-such date) regarding invoice #123, we have not received a payment from you. Your payment is now delinquent by more than 10 days. Please contact us to make a payment so that we can resolve this matter and don't have to escalate this further.”

3. Days 20 or more past due. By this stage, it may be time to pick up the phone. Having a personal conversation may uncover an error such as a wrong address or that the customer is facing a challenging financial situation and, ideally, a payment plan can be arranged.

How do I Further Escalate Payment Collection?

When it's become apparent that friendly emails or letters aren't getting the job done, it's time for small business owners to become more forceful, not only in their language but in the ways they communicate.

If a payment process is breached with late or non-payments, the small business owner would be in a better position because all they need to do is cease further work or services until payment is made. This would be an especially powerful lever to pull if the non-payment involves a construction project.

However, if that's not the case, here are some of the steps a small business owner can take:

• Cease doing business. Telling non-paying customers that you will no longer do business with them due to non-payment may be a strong, symbolic statement, especially if the non-payment involves a repeat customer.

• A certified demand letter for payment. A certified collection letter is a formal document that establishes that the customer has been officially notified of the non-payment. The letter may contain:

1. The amount owed plus any late payment penalty.

2. The original due date and the number of days the payment is overdue.

3. A precise summary of the attempts made to contact them and the dates they were made on.

4. An offer for a settlement or payment plan arrangement in case the customer cannot pay due to difficult financial circumstances, such as sudden unemployment.

5. A final deadline, and

6. Warnings that if payment is not made in full by the final due date, legal action may be taken against the customer, or that the non-payment may be sent to a collection agency and reported to their credit bureaus (if applicable).

When Should You Cut Your Losses?

At some point, small business owners should consider whether further debt collection efforts make financial and emotional sense. Taking legal action against a non-paying customer may not be financially worth it, especially if legal costs would exceed the amount that the non-paying customer owes. While no small business owner enjoys facing the prospect of losing money, writing off the debt that's owed may be the least painful option.

If your business engages in accrual accounting - an accounting method that records revenues at the point of sale and expenses at the point when they are incurred (regardless of whether cash actually changes hands), small business owners should consult with their accountants or tax consultants to see if they can take a deduction on the non- or delinquent payments. Depending on the amount owed, this may be the preferable option rather than continuing debt collection efforts.

How do I Select a Collection Agency?

Collection agencies may agree to purchase your debt by offering to pay a small percentage of it. In exchange, the agency agrees to attempt to collect the debt in full. Often, the agency will agree to take a percentage of what it recovers. Small business owners should seek an agency that has experience in their specific industry (i.e. B2B software, construction, etc.). A small business owner should also look at the success rate of the collection agency, as well as compare prices before selecting one.

Should I Take the Payee to Court?

In the case of small businesses, some debts could be settled in small claims court unless a dollar threshold is met. The thresholds differ from state to state but typically range between $5,000 to $15,000. Unless the amount is significant, small business owners may prefer to take the matter small claim courts because the legal fees can be minimal.

Before deciding whether to take the debt to small claims court, however, small business owners should once again consider whether it's worth the trouble. Some of the factors that should be considered are:

1. There's a large amount of paperwork. While the paperwork varies depending on each state, the application to take a case to small claims court is usually long. Small business owners also need to retain the original paperwork, including documentation on when collection attempts were made and whether a settlement was offered, among other things.

2. Winning in small claims court doesn't guarantee that you'll immediately get the money that you're owed. A victory in small claims court does give the small business owner the right to garnish wages or place a lien on the property of the non-paying customer.

3. A day away from work. A case in small claims court will usually force small business owners to take a day away from their jobs, in which case they can further lose money.

What Steps Can I Take?

Ultimately, the best way a small business owner can deal with non-payments is to avoid them in the first place. Doing this involves taking steps to ensure that a customer will pay before a transaction is made, especially when it comes to large orders or projects. Some of the steps small business owners can take are:

1. Requiring upfront or milestone payments. If a transaction requires multiple steps to complete, then the small business owner can demand a deposit upfront or milestone payments when certain demands are fulfilled. For example, an event planning firm is hired to host a wedding that will cost $50,000. The planning firm can require $25,000 upfront and $25,000 after the wedding is complete. Another example is a small construction company is hired to construct a $500,000 house. The company can demand an upfront payment and partial payments when certain stages of the project are met.

Upfront or milestone payment structures agreed upon beforehand not only guarantee at least partial payment for a project or service but gives customers strong incentives to ultimately pay in full.

2. Performing credit/background checks. If the dollar amount of the transaction is high enough, the small business can request permission to run a credit check on the customer before the transaction is agreed to. A bad credit score indicates the likelihood of the customer meeting payment obligations. Additionally, the small business can request a background check to see whether the customer has a criminal background. Past convictions for fraud or petty larceny should be major red flags for the small business.

3. Investing in good invoice software. Small businesses should invest in using automated invoice software. Most software packages include components that automatically make early collection efforts if a customer is late to pay and keep records of those effort, thus saving time and effort for the small business owner.

Guard Your Business and Cash Flow

Unfortunately, small business owners will always have to deal with customers who don't pay or pay their invoices late, but the damage that it does to cash flows can be minimized. By implementing a clear escalation strategy, keeping precise records and implementing strategies beforehand to prevent late or non-payment situations, small business owners can guard their businesses and not allow non-payments existentially threaten their businesses.