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Debt Collection Strategies that Work (1 of 2)
Part 1 of 2 — AVOIDING THE “DEADBEATS”
It’s inevitable that any business owner, big or small, is going to encounter clients that are just not willing to pay. This is especially prominent in the service industry, as services are an ongoing process and not a one-time product purchase.
It is no surprise that many small businesses do not survive the first two years, and the inabilities to collect from nonpaying clients are likely a large contributor business failure.
The first realization a small business owner must come to is, no matter how nice a client is or how much business they bring you, if they do not pay then they are not a good customer. It is never a good idea to continue doing business with a client who ignores an unpaid invoice.
Despite what you may think, a non-paying client is typically doing so on purpose, not because it slipped their mind. Yes, there may be strenuous circumstances in some instances that provide an exception to the rule, but until your client notifies you of such, and his reasons are legitimate, you can assume that he is avoiding payment.
When you first start your business, there are certain strategies you can implement that will help you to avoid the burden of non-paying clients.
Establish Payment Guidelines
Let clients know from the start what your guidelines are. Explain on your brochure, website, order form, etc. the available payment options for the services you provide. Once you’ve established these guidelines, it is imperative that you stick with them. If a client senses that you are lax in collecting the payment as set out, they may take advantage of it.
Consider Upfront Payment
When providing a service, business owners have a tendency to do the work first and bill later, which can result in collection problems. Your safest bet is to require full or partial payment upfront. If your business provides a short-term service, such as carpet cleaning, payment in full upfront is not too much to ask of your customer. If your business provides a long-term service, such as computer programming, then it is more than reasonable to obtain partial payment upfront.
In fact, you might consider requiring one-third of the payment upfront, another third at the halfway point of the project, and the remaining third within two weeks of completion. If you adopt this rule, or something similar, be determined to not continue or finish the project until the payment due is received. Inform the client of this payment plan in the beginning and, chances are, they will be sure to pay on time because they want the finished product.
Develop an Accounts Receivable Department
Some small business owners are tempted to allow the sales department to also deal with accounts receivable. If your business has the ability to hire the employees, establish a separate accounts receivable department or put someone in charge of collecting payments. This will insure that someone is always aware of what clients have paid and what clients are behind.
Put it in Writing
Make this your policy with every new client. Legitimate clients understand that you need the terms of your business relationship in writing in order to protect your business. Be sure your agreement covers what product/service you will provide, when you will provide it and how much and when the client is to pay, including any interest/finance charges applied to late payments. If a potential client refuses to sign the contract, then they likely won’t pay you and are not worth your time.
It is also important to state in the contract that, should the client not make payments as agreed, you reserve the right to pursue action through the court. Also state that, should court action be necessary, the client would be responsible for paying court costs and your attorney fees. Let the client know that this is simply a precaution and you have no reason to believe that court action will be necessary. However, if the unfortunate occurs and you have to pursue a lawsuit to collect what is owed to you, you cannot collect attorney fees to offset your expenses if it is not stated in your original agreement.
Have Clear and Concise Invoices
Your invoices will need to be systematic and dependable. Again, if you are lax in sending invoices consistently, then the client will get the impression that payment is not a high priority. Be sure that your invoices are numbered, that the billing terms and due date are visible and clear, and that they are sent to the correct person. I highly recommend using invoice software, such as Tabs3 or Billing Tracker. Google search “invoicing software” and find the program that best fits your needs.
Provide Incentives for Prompt Payment
Give your clients a reason to pay their invoices as soon as they receive them, whether positive or negative. Some options are:
• Take credit card payments. Often this will give the client the ability to pay their entire invoice at once. Keep in mind, however, that, with each credit card transaction you accept, a percentage of that sale goes to the credit card company. Make sure it is an expense your business can handle.
• Give a discount for payments made promptly. Consider offering, say, a ten percent discount if the client pays their invoice within 15 days.
• Charge interest on overdue accounts. Consider charging your client interest on the unpaid balance if payment is not made within 30 days of invoice. A common interest rate is 18 percent per year, which equates to 1 Â½ percent per month. Most invoicing software will calculate interest on an unpaid balance automatically.
What if they still won’t pay?
Working as a legal assistant to collection attorneys for three years, I have some helpful advice to share. Part two of Debt Collection Strategies that Work covers what steps you should take when a “deadbeat” client slips past your guard dog tactics.
Always consult with an attorney before pursuing any debt collection strategy. The opinions in this article are not to be taken as official guidance but rather as an informational supplement to your overall debt collection strategy.
PART 2: When Clients Still Won’t Pay
• SeniorMag.com: Bill Collections
• About.com: Collection Letter Secrets
• FindArticles.com: Collecting Payments Due
• BusinessKnowHow.com: Small Business Collection Strategies
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