How to Collect When Your Customers Won’t Pay
By Mike Drummond
Got problems collecting from deadbeat clients?
Steve Lundin, chief “hunter and gatherer” for Chicago-based public relations firm BIGfrontier Communications Group, has this advice:
“You sue them.”
Earlier this year, Lundin filed a lawsuit in small claims court against marketing agency Colle+McVoy. Lundin, who filed the complaint pro se and has since retained an attorney, insists the Minneapolis firm owes him $5,000 for a month’s worth of PR work from last summer.
The alleged past-due bill occurred after Colle+McVoy came under new management, Lundin maintains.
“Everything seemed to be hunky dory,” he says, “they were just late in paying.”
Colle+McVoy disputed the invoice and declined to pay, sparking Lundin’s ire.
“At the end of the day, it was being personally insulted, rather than the lack of money” that triggered the lawsuit, he adds.
Lisa Miller, chief financial officer at Colle+McVoy, laughed when asked about the lawsuit, which seeks $5,000 plus attorney’s fees.
She says the company has done business with Lundin for years and that he’s made an invoicing mistake.
“We’re a $60 million company, for God’s sake,” she says. “The moral of the story is, make sure your invoices are correct – we wouldn’t be disputing this if his invoices were right.”
By the end of this summer signs of economic recovery were surfacing – factory orders, inventory and housing starts in some markets showed improvement. Yet access to credit and cash flow remained a problem. As did unemployment, which hovered near 10 percent, the highest since 1983.
The recession that officially began in late 2007 generated mounting business and consumer debt. Collection agencies made a killing. Of the $152.5 billion in bad debt that companies charged off in 2007, debt collectors recovered more than $40 billion, according to collection agency trade group ACA International.
“Receivables slow during any financial downturn,” says business attorney and Entrepreneur magazine columnist Nina Kaufman. “But when the downturn is the magnitude of the current financial crisis, the problem is only intensified.”
For some small businesses such as Lundin’s BIGfrontier, a lawsuit is, literally, the court of last resort when it comes to collecting. Others increasingly turn to collection agencies, which typically get a cut of 15 percent to 35 percent cut of anything collected. Then there’s the tried and mostly true method of hounding delinquent clients.
Kaufman and others argue you shouldn’t get into the position of delinquent receivables in the first place.
She likens cash flow to blood flow in your body. Blood sustains your brain, heart and other organs. Your business can’t sustain itself if cash isn’t flowing.
“Receivables aren’t currency,” she said in a recent webinar, How to Train Clients to Pay You. If cash “is not in your system, it can kill your business.”
She recommends training yourself to train your clients, and that can start with wisely selecting with whom who you do business. Before taking on a client, you should consider its revenue, number of employees, budget and references.
“Don’t ignore warning signs of a problem client,” she says. “If you’re making bad choices, you’re bringing these problems on your own.”
Being picky, however, is easier said than done in challenging economic times.
Regardless of the client, when it comes to invoicing, the experts recommend:
- Set clear expectations – in writing and in plain English – at the outset about what you’re getting paid and when. Increasingly, courts have allowed e-mails to qualify as written agreements, but a formal contract is best.
“Forget a verbal agreement or a handshake,” says Scott Lorenz, president of Westwind Communications, a public relations firm based in Plymouth, Mich. “With the turnover in staff at all levels, the guy you make the deal with could be long gone by the time you need to get paid.” Having an agreement in writing “holds up quite well if you need to get a lawyer involved for the collection,” Lorenz adds.
- Include what will happen if the client is delinquent in paying, including charging interest and withholding services until payment is made – and make sure to make good on those stated consequences.
- Get paid in advance. Offer a discount if the contract is paid for up front –10 percent is a good number.
- Set up a merchant services account with your bank so you can accept all major credit cards.
- Your written agreement should specify that clients have 10 days to pay the bill by check or the credit card will be charged.
- Get a signed document that indicates the service charged is non-refundable so it’ll hold up with the credit card companies should the customer decide to try to get the money back.
- Follow-up on invoices promptly, preferably with a polite phone call. “If you’re lazy with sending invoices,” says Kaufman, “don’t be surprised if a client is lazy in paying you.”
- Reinforce “good behavior” or timely payments with a friendly thank you note or e-mail.
More Flies With Honey
In desperate times, the desperate often turn to collection agencies. But outsourcing your bill collecting comes with a cost.
Some agencies charge up to 50 percent of the amount they collect on your behalf.
Then there’s legal liability. Complaints against collection agencies topped the list of consumer complaints last year, mostly for harassment, according the National Association of Attorneys General.
Collection agencies are regulated by the Fair Debt Collection Practices Act. This restricts a wide array of activities. Collection agencies can’t threaten to take someone to court, inform third parties about a debt owed, or garnish wages, among other things.
In fact, collection agencies work on volume. Their primary tools are computer-generated form letters and scripted phone calls.
Yet frustrated inventor-entrepreneurs and business owners can rip a page from collection agencies. Sometimes it helps to create a sense of urgency with phone calls and letters, noting that the delinquent client has 10 days to settle up or further action may be taken.
You can note that at some point the collection will be handled by someone else, who may not be as understanding as you.
Then there’s the trick of using another company name, address and contact when sending delinquent notices. Sometimes people take third-party inquiries more seriously.
Roger Slade, a collections attorney and partner with Pathman Lewis in Miami, recommends taking a kinder, gentler approach.
“If you’re overly aggressive,” he says, “you can spoil the relationship.”
A personal phone call often works best.
But be wary of the sob stories. He recalls a client who had let a customer’s past-due balance linger for two years. The client felt badly because the customer said he had cancer. Then his wife had cancer. Then his daughter, as fate would have it, also contracted cancer.
“I told him that doesn’t seem likely,” Slade recalls. “Over time, explanations can get more incredible.”
Indeed, time is the enemy of overdue bills, according to data from ACA International. The more time lapses, the less likely you’ll get paid – companies fold, key players move on, paperwork gets lost.
Yet even if months or even years have slipped by, all may not be lost.
Slade recalls a client who had a $300,000 judgment awarded to him. By the time the client approached Slade’s firm, 10 years had passed. His client heard at one point that the deadbeat customer was living out of his car, but that his fortune might have changed.
“I’m not sure why we took this case,” says Slade, “but we did.” The firm hired an investigator, who found that the former deadbeat customer was doing very well financially.
At the end of the day, the customer repaid Slade’s client 100 percent of what was owed, plus attorneys’ fees and interest for 10 years.
“Persistence can pay off,” Slade says. “And savvy businesspeople have a way of bouncing back.”