For any small business, cash is King. Without a doubt, the single most damaging risk to you as a small business owner is negative cash flow. One of the many reasons for negative cash flow are slow or no paying clients. They can sink you faster than you can say “small claims court”, if you let them.
So, how do you get clients to pay you on time? While there is no magic bullet, there are some things that you can do to minimize deadbeat clients. The theme to keep in mind here is that “Prevention Beats Collection Every Time”.
First, vet your client up front. Weeding out those who are not likely to pay you minimizes your likelihood of getting stiffed. Be especially wary of clients who are “jumping ship” to hire you because they are unhappy with their last service provider. That’s a red flag that there might be a fee dispute. That doesn’t automatically mean that you won’t take the client, but it may change how you structure your relationship.
Second, always have a written fee agreement with the client that, among others, covers the following:
- A description/scope of the services or product to be provided
- The amount and terms of payment
- Client obtains no intellectual rights in the work product until payment in full is received
- Work ceases if payment is late and will continue only after account is brought current
- Client property will be held if payments are late
- Client is responsible for all collection costs
Third, you can eliminate any collection problems if you get your money up front. So, get 100% of your fees up front. When that’s not possible, get as much as possible. I recommend that clients get at least 50% up front (2/3 if they can get away with it), with the remainder due upon completion. If you have to, accept smaller upfront payments, but in more frequent intervals (e.g. 25% up front; 25% in 30 days after certain milestones; and the balance upon completion).
Note that these terms should be in your written agreement!
Fourth, communicate early and often. Send status updates and invoices on time. Clients are less likely to complain about the work and more likely to pay invoices if they are kept informed about the progress of the project, asked for regular input and feedback and provided with timely invoices. In fact, if your invoices are regularly sent out late, you risk late payments, or worse, no payments at all. If you’re a slacker, you’ll train your clients to be slackers too.
Additionally, your invoice should be unmistakably clear as to what (how much) payment is due, when is it due, and where payment should be sent. This sounds really simple, but it doesn’t always happen. The invoice is your first request for payment. This is not the place to be sloppy.
Fifth, offer a discount for early payment. You might even offer a discount for on-time payments (hey…drastic times call for drastic measures…don’t stand on principle and end up out of business). The downside, perhaps, is that some clients may expect this as the standard. IMHO, you should take the early cash, raising your fees if necessary to offset the discount. Cash now beats cash later all day long.
Sixth, some people believe that if you offer a carrot (discounting fees for early or on-time payments), then you should also wield a stick- penalties for late payment – such as interest on late payments, a late fee, etc. I disagree. First, clients rarely pay the interest or late fees, which then creates another collection effort if you want to enforce the penalties. Second, it creates ill-will with clients. Except for the worst of the worst deadbeat clients, try to maintain a cordial, professional relationship with the client when possible. It’s not worth the client bad-mouthing you to everyone in town about your “unfair, overbearing” billing policies.
If you decide to use penalties, make sure they are in your written agreement.
So, what if you follow this advice and the client still doesn’t pay? I’ll tell you what to do in my next post.