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In Contractorland, clients always pay on time -- half up front and half upon completion. But in the real world, sometimes clients don't pay at all. In addition to hurting the bottom line, this hurts everyday operations because you have to struggle with the unpleasant process of billing and collecting.
"Most people would rather have a stranger go through their underwear drawer than have to ask a client for money," says Lisa Drake, a Mountain View, California-based CPA who consults with small businesses.
But you gotta do what you gotta do to get what's due to you. So here are some tips you can take to the bank:
Plan Ahead
You can mitigate the trouble by stashing cash away before you need it. "Have at least enough in reserve to keep from charging your groceries and rent until Pet Fancier magazine pays you for your in-depth article on appropriate attire for Chihuahuas," suggests Drake. Your accountant can help you figure out what you need to get by in cash flow each month.
Get to Know AP
One of the most effective tactics for getting paid on time is developing a relationship with the accounts payable staffer who actually cuts the checks, advises Beverly Hills-based Dan Stockdale, who contracts with companies to provide leadership-training programs. "I had a client in Memphis who kept extending the contract but was not timely in paying," he recalls. "I found out who the AP clerk was and sent her a box of brownies. From that point on, she always overnighted my check to me. Of course, I never failed to send a little thank-you box to replenish her cookie supply. Simple, but it worked."
Give an Incentive
You can motivate people who are paid to pinch pennies with a small reward for prompt payment. "Offer a discount if the contract is paid for in advance -- 10 percent is a good number," suggests Scott Lorenz, a communications contractor in Plymouth, Minnesota. "You'd be amazed at how many people will jump on this. There are tax advantages for some; others like the savings."
Make the Call
Call clients a few days after you expected to receive payment and didn't. "You need to know if there is a legitimate reason that your invoice hasn't been paid," Drake says. "Clients won't often seek you out to tell you that your amount was incorrect or you were missing a PO number that they need for their accounting department to pay, so call just to make sure there was nothing holding up payment." If you're getting stonewalled, ask your accountant to call to make the situation seem a little more serious.
The Last Resort
If these techniques don't work, do what collections professionals do: Get active. "Call your client, verify the amount and date due and tell them you need a cashiers check or money order by a specific time and date," counsels Scott Reynolds, head of SCR Group, a Chapel Hill, North Carolina-based firm that offers field services like face-to-face delinquency interviews and collections. "Be friendly and nonconfrontational."
This usually does the trick. "If not, put together a basic collection letter noting the amount due and that payment is expected no later than five business days from the date of the letter or you will take legal action to collect the debt," Reynolds says. "Send it certified mail with a return receipt for proof of delivery."
If there's still no movement, the best course of action may be small claims court. In most states, you can claim about $3,000 without engaging an attorney. General guidelines are available at Nolo or your state's division of courts.
In the end, Drake says, persistently slow- or no-paying clients may not be worth it. "If clients are slow to pay or you have to chase them down to get your money, stop doing business with them," she says. "Concentrate your energies on finding new business. The good companies to work with are the ones [that] pay us little guys first. And there are plenty of them out there."
