30…60…70…86…124 days later, there’s still no check in your mailbox.
The other damnedest thing is that the client was probably all up in your grill when they needed something done. And now that you’re looking for the cash, they’ve gone down-periscope.
I’ve always found it amazing how difficult it is to communicate with people to whom we owe money.
Just this morning, I emailed two contractors with the following information:
1) I’m out of town
2) I arrive back home on Monday
3) I’d be sending them a payment on Monday
4) I’d have an ETA on full invoice payment on that date as well.
It took me 2 minutes to be 100% honest so they can plan their finances.
So how do you handle a client that won’t pay? I’m sure there are plenty of you with tips to share on the subject — and I look forward to hearing them. But I’ll start with things we can all do for our businesses that can help alleviate the Kobiyashi Maru of business: the No-Pay Scenario.
Get an Ironclad Contract in Place
Before you commence a project, state your payment terms loud and clear. I have a simple two-page Scope of Work that’s been reviewed by my attorney. It’s ironclad, will hold up in court, and states:
- How I get paid
- When I get paid
- What I get paid
- What happens if my invoices are paid late
- How we settle disagreements if we disagree about something
In fact, I cover all of that in a paragraph. Here’s what it looks like:
To commence work, a 50% deposit is required. RHW Media, Inc. accepts checks and online payments via eCheck and all major credit cards. Regrettably, work cannot commence until commencement funds are on deposit. RHW Media, Inc. does not engage in trade unless you have an awesome Ferrari in showroom condition with pink slip and keys. Balance on all projects is due Net 10 from invoice date upon project completion and will otherwise accrue a 10% late fee beginning on the 11th day following the invoice date. All work contracted during the project period that is above and beyond this scope of work will be billed at project completion (I call this “when we’re done”). All additional work must be agreed to, in writing, by both client and RHW Media, Inc.
I didn’t used to have late fees, but you can bet your sweet ass I do now. Why? Because I am more than happy to wait for you to pay me whenever you feel like it. Just like my credit card companies, my landlord, my car finance company…and they charge me for taking my own sweet time to pay up.
On occasion, clients have an Independent Contractor agreement that is part of their standard practice. In those cases, I simply add an addendum to my Scope of Work, saying we’ll be abiding by the agreed upon terms in that agreement. My late fees, however, still apply.
Want to make sure clients can’t come back later and say they had a problem with your work? Work in an Acceptance Clause. Mine looks like this:
Acceptance: From draft submission, client has 5 days to review and respond with feedback. We believe in keeping your project moving! If we don’t receive acceptance/requests for revisions in 5 days (weekends are not “days” – those are days we ride bikes), we’ll assume you feel the work is Pulitzer-worthy and in no need of additional revision.
And get it all in writing. I’m personally not a fan of snail mail for contracts, so I use an online document signature service called EchoSign. It’s free for up to 5 documents per month (you can get another 5 for free if you agree to let it post a Tweet for you when you get a document signed…oy). It sends you a PDF when everything is signed. File this away, mkay?
Now, you’re welcome to steal my Scope of Work verbiage. If you do, get it reviewed by an attorney. You want to make sure both your ass AND your clients’ collective asses are all covered. Money’s a bitch — but only if you allow it to be.
Project’s Done — Get Paid!
Are you lazy about invoicing? Quit that shit. I talk to more talented business owners about cash flow problems than anything. Mine’s getting better every month, but invoicing is something I’ve never had a problem with. Here are a few steps that can help you get paid faster:
- Make it a reflex: Invoice the day you deliver a project.
- Retain Rights: If you do creative work (web dev, writing, design, etc.), consider an additional clause in your Scope of Work like I have (following). This makes sure that people can’t pay you a deposit to get started and then legally use what you create without ponying-up the final dolla-dolla:
- “Right to all materials created under this Scope of Work will be released to the client upon receipt of final payment for services rendered. Until that time, all rights are reserved by RHW Media, Inc.”
- Get a reliable invoicing system. It’s not Paypal, I assure you. I’ve talked about multiple invoicing systems that all have auto-generated reminder capabilities.
- Accept online payments. Seriously — if you want to make it easy for clients to give you excuses like “check’s in the mail”, skip online payments. But when you make it easy for people to pay you, you might find that they run out of excuses. You can write the transaction fees off on your taxes at the end of the year.
Still Not Getting Paid…FML (How to Fix It)
It sucks. You can’t drive off a car lot without signing a metric ass ton of paperwork saying you’ll pay. You can’t show up at the doctor’s office and expect to be seen without handing over your co-pay.
And now a client thinks it’s OK to go down-periscope on you when you’ve delivered everything contracted — to the client’s great delight, on their timeline, and with a smile.
First, stop with the emails when you’re trying to collect funds. Pick up the everloving phone.
Don’t have a phone number? Find one.
If it’s been this difficult to get paid, you’re probably not interested in going through this again and the client is off your “favorite” lists. Let’s get paid.
- Leave a voicemail for your contact, stating that you’re following up on why payment hasn’t been made on your invoice. You’re sure it’s an oversight, but the invoice is now X days past due. Would they kindly return your call within 48 hours with an update and expected timeline?
- No response? Not uncommon. Find their supervisor. Just call the company’s main line and ask to be put in touch with John/Jane Doe’s supervisor. Got voicemail? Let them know who you are, the date work was completed, and that you’re having a dickens of a time getting paid. Would he/she call you back within 48 hours?
- No response? Not uncommon. Call that receptionist back and ask to be put through to Accounts Payable. At this point, offer to send them a copy of your signed contract and that you’re about to pursue collection measures due to nonpayment. You’d LOVE their assistance in getting this worked out!
Now, when you’re dealing with a smaller company without these ladders to climb, it’s harder. The whole company can be one person and they can hit “ignore” every time you call.
When all else fails, be prepared to write-off the invoice as a bad debt at the end of the year. Keep track of all of your collection efforts (as the IRS might want to see them) and call it a day. You could also pursue hiring a collection service for larger invoices. They will screw up your client’s credit and go after them with guns blazing. Should they recover the funds due, you’re looking at fees ranging from 10-15% of the invoice total. If some of everything is better than all of nothing, this might be a viable solution.
So…on that “Getting Paid” thing
The best defense isn’t a good offense. It’s being a smart business person. Have a contract that clearly spells out terms. Get a grip on your finances and don’t be a lazy invoicer. Also, bill retainers in advance instead of in arrears (always smart). If problems arise getting paid, run it up the ladder. You know your contract is ironclad and if they’re not paying, be firm and request a response. Run it up the ladder if you need to. In the end, be prepared to write it off if all else fails. Move on — and think about this:
Why did you decide to do business with this company in the first place? Were there any warning signs that you might have problems later on down the line?
Chances are, the answer is yes. So stop doing business with those people and start doing business with people who understand that cash = work. My world is filled with wonderful clients that pay me on-time and cause me zero stress in the payola department. I can only hope I cause them zero stress in the product and quality departments in return. We can ALL think of ways to do better in business — but getting paid, and in a timely fashion, is usually a byproduct of committing to doing better business (and with better people) on every level.
Now — have ideas for the others here on how to get paid (or what to do when you can’t get paid)? Pony up and share!
Great advice for dealing with a very painful subject!
If a client is big enough (i.e. they actually have an Accounts Payable department) I always ask for a Purchase Order number before starting a project. This forces them to enter the project into the accounting system. In many cases an invoice with a pre-approved PO number will get paid by accounting without further approval. Always better to avoid the mess than have to fix it.
Show me the money.
In my world of commercial insurance sometimes customers ask for 'terms' outside what the insurance carrier is willing to provide; in essence, they want us to be the 'bank.' First of all, I might have a little flexibility, but not much and the last thing I want to do is extend credit and not get paid because then it becomes my responsibility to make the payment good. It takes only getting burned once on that deal to get your attention.
You have the right approach; set the ground rules up front so the expectations are clearly known. Even in the down economy we probably invoiced close to $100 million in premium last year and had less than a 1% bad debt ratio, which is pretty standard for us. Even though we are providing a 'service,' we still have to get paid, right; and fat boy gotsta eat so I like my money.
Thanks, Erika, for this valuable review of best billing/collection practices. Another approach I have used is to offer a discount (2-5%) if invoices are paid within 30 days. I find that even that small discount is a much more compelling incentive for prompt payment than a penalty for late payment.
Love it. I recently had to change my model so full payment is completed BEFORE we start work. I also need to draft in something similar to your clause above about re-writes -- there's nothing worse than being full-throttle with someone else's project and having someone come back and need something tweaking. Implementing tout suite.
http://vimeo.com/22053820. More thoughts on this topic.
Great topic! Even big companies have issues with getting paid on time - and cash flow issues are a bitch. Here's my policy, born and cultivated out of necessity:
All invoices under a certain amount are paid in full before work is even scheduled. Once I have their deposit, work is scheduled and milestones are established based on scope and current workload. Invoices beyond that threshold are subject to a 50% deposit, with the other 50% due upon completion but before any deliverables are presented or websites are turned live. For monthly retainer fees, everything is paid up front before I touch anything. I used to offer multi-month discounts as Tinu mentioned - but as my rates and overall contract amounts increased, it became more of a concession that I could justifiably make.
I've had people give me a little resistance from time to time - but as business owners, they usually understand when I explain that I have immediate out of pocket expenses with respect to their project. Plus it levels the playing field and holds all clients to the same standard - I can't justifiably put someone's project ahead of someone else who's already paid in full.
As to accepting electronic payments - CC fees are a cost of doing business. Cash is of the utmost importance to a business owner - and the ability to pay via CC vs. writing a check might be the difference between whether you get the contract or not.
They need their cash for the same reasons you do - to pay employees and other pressing, non-negotiable immediate expenses. The ability to pay with a credit card allows them to invest in their business, which if you are a developer or consultant or operate in a similar arena, that's what you are to them: an investment.
That said, if the 3% is too much to absorb (and it very well may be - 3% of $3000 is $90 - which is not insignificant), then adjust your fees to handle the extra business expense.
As tweaked as it may sound, it's nice to know I'm not the only person this happens to (even though logically I know better, it certainly feels like you're the lone wolf when it's happening). I've run the gamut with adjusting proposals, payment process, etc. but I've never instituted a late payment fee, probably time to do that.
Besides shifting my business model (more teaching to groups, less individual projects), I do WP sites for clients and now build them completely on my own server (I do NOT host them). Once the pmt. is made in full we move the site to their server. No payment, no site. My next step is auto charging on the due date.
I'm printing your statement: "getting paid, and in a timely fashion, is usually a byproduct of
committing to doing better business (and with better people) on every
level" and taping it to my monitor!
Erika, You tackled online/electronic payments but I'd like to put some emphasis on that one.
I frequently hear freelancers and very small businesses say that they don't want to take Paypal or Credit Cards because of the fees, but that is NOT a good reason, you can write those off. More to the point, I've lived by a philosophy which has proven true for me so many times it should be regarded as immutable law:
The easier you make it for your customers to pay you the more likely (and quickly) they will.
You will loose far more in lost opportunity and time spent chasing down customers for payment than you're loosing in fees!
The number one complaint I hear from clients is, "Business is improving but we're having trouble getting paid." I've learned to avoid that by getting paid in advance. I let my prospects know that those are my terms and my letter of agreement clearly states it. When I send the letter of agreement, for signature, the invoice is attached to the same email. Don't pay? I don't show up. It's my job to improve sales for the organizations I'm working with and I'm freaking great at it. It's NOT my job to finance them. The exception is large gigs (over 20k) in which case I'll take half up front and the other half is due halfway through the engagement. Don't pay the second half? I don't show up.
It's CRUCIAL to be very clear about your terms when before closing the deal and again when the contract is being signed. Speak with complete confidence when you tell the prospect your price ("For the work we've just discussed your investment is just...") and your terms. Your attitude should be, "This is what I charge ad how I get paid and OF COURSE you'll find it agreeable!"
Had a client almost two years ago who I specifically told I get paid up front. Reminded him of it before he signed. (CEO of a $70 million company. Smart guy. Good guy. Drives a Maserati) Still, the day after signing he emailed and asked for terms. I sent a long explanation of why I don't offer terms and then said I'd make an exception but was charging interest. (Exorbitant interest in an effort to discourage him from wanting terms) He sent back a one word email saying "Accepted." Sent over new contract. First payment was delayed and I STOOPIDLY started the work. (Don't break your own rules!) After MUCH ado it finally turned out that the COO wouldn't pay the invoice because he read the new contract and saw the high interest rate and he took it to the boss he (The CEO) admitted that, he has "...a bad habit of not reading past the first few sentences of an email and never saw the large interest rate I was going to charge him." Said, "I never would have agreed to that."
At that point the relationship was soured and I ended up losing thousands AND a client that I could have done great work for. Got paid for the work I did but way less than the value I gave them.
Live and learn!
@jeffg11561 Thanks for sharing your experiences, Jeff. This is another reason I use Echosign -- a signed legal document is an awesome thing to have in your arsenal. :)
Really enjoyed this article. I'd also add that what really flipped my worry on getting paid on time so that it's a minority of my clients is offering a discount in trusted relationships for getting paid in advance. I now only have one client that pays in arrears, and that contract was set up before I started this system. We've been working on the issue of late payments together, and they're down from 6 weeks late to 2 weeks late.
My big flaw was that I'd been very lazy about assessing a late fee once my invoicing system became automated. But now that it's also handled by a dedicated person who isn't me, if I take on any other accounts like that it's bound to get done!
One of the things that is in all of my contracts is the following:
"a 5% discount is automatically built into the price of stated work. This discount is in exchange for permission to use the brand name and logo as a listed client for marketing purposes by Drench Labs, inc. Should the client opt to not allow use of their name and brand, the 5% discount will be nullified and the price of the work will increase by 5%."
Legally, you cannot use a customers brand, even if you've done work for them, without their permission. This tries to abate that.
Fantastic advice for those of us moving into new territory! Lots of people keep this information close to their chest; it was hard lessons for them and damn it, everyone should learn along the rocky road. Simple clauses and communication like this will help so many people build solid, professional arrangements and get back to making money for being awesome. Thanks Erica.