Home Business Issue: Should You Send a Client to Collections?

If your home business client or customer isn't paying up, should you send the bill to collections?

This month has been a little frustrating for me. I have more than $1,000 in outstanding invoices to clients. The effect on my cash flow, since I've made some adjustments, hasn't been horrible, but it's still a little disappointing.

The good news is that, for the most part, I know that my clients will come through for me. But there is one client who should have made payment back in December. And still hasn't. This client is a one-time client. I was smart enough to get half of my payment upfront before starting the project, but the last half of the payment, after I went above and beyond, still hasn't arrived.

Now, I'm contemplating sending this particular home business client's account to collections. It's not something I've done before, even in the early days of my home business, when one client stiffed me $2,000. But this is sticking in my craw right now, and I'm about ready to take action.

Is It Worth It To Send a Home Business Account to Collections?

I probably should have sent the client's account to collections or taken the matter up in small claims court. My current client owes me much less than the old client. But my records are better now due to automated invoice processing than they were when I started, and I have the client's agreement to my terms.

I just need to decide if it's worth it to go to the next step. According to my FreshBooks account (I love this service BTW), this particular invoice falls into the 60-90 days category. Likely, I'll wait to take decisive action until the payment is in the “over 90 days old” category. So far, here's what I've done:

  • Re-sent the invoice every two weeks as a reminder.
  • Last week, I sent a personal email, drawing attention to the reminder invoice and asking if the client had unsatisfactory feedback to provide.

None of these tactics produced a response. Toward the end of December, the client did respond, apologizing and promising payment the following week. But since then, nothing. No response to my gentle question about whether or not he was unsatisfied in some way with my work.

So, now I'm trying to decide what to do next.

Options if Your Home Business Client Isn't Paying Up

According to About.com, I might need to change up my collection efforts a little bit, actually writing increasingly direct letters. I've tried the gentle approach, and now it might be time to step it up a notch. Sending warning letters is a first step prior to taking action.

If that doesn't work, my options, for the most part, are:

Use a Collections Agency

There are a number of collections agencies out there that can help you process your claim. Some agencies will “buy” your invoice from you, paying less than “face value” for the invoice, and then trying to collect on it. In other cases, you might pay a fee upfront to the agency and then a small commission when the invoice is collected on. Finally, there are agencies that will try to collect your invoice without charging you upfront and then take a cut of what is recovered as a commission. I would likely go with the last option if I decide to go the collections route.

Small Claims Court

Many states have small claims courts, where you can attempt to obtain a judgment against a delinquent client. In Utah, the fee for filing a claim of $2,000 or less is $60. That would make it worth it to file against my client. Check your state for information about small claims, and the fees charged, as well as limits on amounts. Many states limit small claims amounts to anywhere between $2,000 and $10,000. (Utah tiers small claims at the $2,000, $7,500, and less than $10,000 level.) Most of the time, you don't need to be a lawyer or hire a lawyer for small claims. You just need the proper documentation.

Other considerations

Also, consider how much time it will take you to build a “case” against the client. How many hours will you expend in your efforts? In my case, it's relatively simple, I think. I have an agreement from the client to pay what he still owes. I have an email from him promising to pay me what he owes. And it helps that there are three lawyers and one lawyer-in-training in my extended family to help me with pro-bono law things.

Even if I take these actions, and he doesn't pay up, there is still the possibility that he faces consequences for his decision. After all, a judgment against him from a small claims court or a collection account on his credit report could be a problem in the future. But I still hesitate to cause such public problems for a client.

It's a tough call for any home business owner.

What would you do if a client didn't pay up for a product or service?

4 thoughts on “Home Business Issue: Should You Send a Client to Collections?”

  1. THANK YOU for this, Miranda! I’ve been fortunate to only have been stiffed once in the past 4 years – and or only a small amount – but I’ve wondered, “What would I do if…?” You’ve provided some very helpful info – and I dub this post “Keeper!!” I’ll be sharing it across my social network channels because I think there are many others who will benefit from the info, too.

  2. Good luck, Miranda. I certainly think it is worth it for multiple reasons. First, assuming you value your time at $50 an hour, and hoping this doesn’t take more than 10 hours of your time, if you collect a significant amount over $500, it is definitely worth it. Second, I would probably draft a legal letter or have an attorney friend do so, and keep it on file for future use. The last thing people want is to get into a legal dispute, ESPECIALLY when they know they are wrong. Sometimes a strongly-worded letter from a lawyer can make all the difference. And lastly, it will put any client who tries to stiff you in the future on notice. That you can and are willingly to take legal action, if necessary, can be a great incentive for people to actually pay you.
    On your invoices, I’d even consider adding a line at the bottom that suggests you will charge 3% interest for late payments beyond 30/60/90 days. Why not, right? Haha =)
    Hope it all works out!

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