There are few things that can cause more stress to a small business owner, or any business owner, than a customer who doesn’t pay as agreed. Some entrepreneurs are prepared for this as a natural cost of doing business, while others are shocked that seemingly trustworthy clients would renege on such an important promise. While we may not be able to make this problem go away entirely, we can prepare ourselves both mentally and practically for when it happens.
BEFORE IT HAPPENS: Sometimes the best offense is a good defense. What you do at the beginning of a business relationship or sale often can go a long way to preventing problems down the road. Some business owners are naturally cautious or have a background in contracts which leads them to put measures in place prior to an incident of non-payment. But many owners take action only after a horror story occurs.
Consider vetting your new customers and clients by talking to vendors and suppliers that have worked with them in the past. Many of us do business in a community where we are only one or two degrees of separation from key players and can make discreet inquiries through our network about client personality, payment patterns and any other red flags that you might want to know going in.
Also, take a hard look at your written agreements, including statements of work, service level agreements and other contracts. Ask yourself: In the worst-case scenario, will you wish you had tightened up the language or provisions? If you’ve been in business for a while, what are your lessons learned and are they are reflected in the agreements you use? Examples include getting a deposit before starting work, being specific about the work that is owed, and setting timelines for receiving payment, especially when there are delays beyond your control or due to the client.
WHEN IT HAPPENS: If at all possible, maintain a cash cushion against what many would say is the inevitable day that your customer either doesn’t pay on time or doesn’t pay at all. On the personal finance side, we know that an emergency fund is a good idea, and this is equally true on the business side. Sometimes all it takes is one delinquent customer at the wrong moment to create a cash flow emergency.
If you have such a cushion, it will make it a little easier to stay objective. When emotions are running high, try to remember not to take it personally. Customers have many possible reasons for failing to pay as agreed, and sometimes it is better not to ascribe a motivation.
Also, don’t wait for an invoice to become significantly overdue before you begin communicating increasingly firm reminders, a process known as “dunning.“ When something is 30 days past due, it is easier to open a dialogue with your customer than when that same bill is 90 days past due. Recognize that there is a natural tendency to avoid difficult conversations, so talk sooner rather than later to minimize your client’s defensiveness and embarrassment.
AFTER IT HAPPENS: Once it has become clear that payment won’t be coming, you’ll need to decide among a variety of options. Depending on where you live and the amount owed, there will be different avenues available to you.
You may decide to trigger an arbitration or mediation clause in your contract, or take your customer to small claims court. You may simply write off the loss as bad debt, or you may turn the matter over to a collection agency. Whatever you choose, consider seeking professional legal or financial advice before you act.
Finally, take stock and see if there’s anything you want to do differently next time. If there is, get those changes implemented. If there was nothing you could have done to prevent the situation, just dust yourself off and get refocused on landing that great, promptly paying customer.
Jennie Wong is an executive coach, author of the e-book “Ask the Mompreneur“ and the founder of the social shopping website CartCentric.com. Email her at TheJennieWonggmail.com.