Clients who refuse to pay? Here's what to do.
Running your own business gives you a measure of freedom. You can set your own hours, control your income, and when you need to take time off you don't have to consult with an employer. But while there are certainly positive aspects of being your own boss, you also have to deal with other issues: deadbeat clients who refuse to pay.
Regardless of how well you manage your business, you may deal with a non-paying client from time to time. Not only do you lose money, but also time. And depending on the size of the amount due, a non-paying client can set you back financially.
How to avoid clients who refuse to pay
Rather than having to deal with these deadbeats, you can reduce the chances that you'll end up with them in the first place. Here are some things to consider:
Choose your clients carefully
Understandably, you may be desperate for work. But if you accept any and all clients, you may set yourself up for disappointment. Get to know potential clients before you take on new assignments. A brief five-minute or 10-minute conversation about the project can help you decide whether the project is worth your time, and it's usually enough time to gauge whether you feel comfortable working with the client and whether you think he or she is among the clients who refuse to pay. Don't be afraid to request references from potential clients, and always follow your instincts. If you have a bad feeling about a particular person, think long and hard before taking them on as a client.
And if you learn the hard way later, get ready to fire the client quickly before they owe you too much.
Get payment in advance
If this is a client's first time working with a freelancer, or if you learn that a client has a history of paying invoices late, request advance payment for any projects. This approach might not set well with some potential clients, but it's the best way to protect yourself from those who may stiff you. To put clients at ease, let them know that this is your policy for the first few months or until you've established a relationship. After that, you'll consider switching to an invoice system.
You can also meet your clients halfway and require only 50% upfront. When there's a big job on the horizon, I make sure to get at least 50% upfront. Sometimes I break it into thirds. You get 1/3 upfront, 1/3 halfway through, and 1/3 upon completion. The key is to come up with a way to get at least some of the money before you start to reduce your risk.
Create a contract
Don't rely on a handshake when doing business with clients. Some people develop amnesia when it's convenient for them. Without a written agreement, the client may decide not to pay or pay when they're good and ready. Even if the client eventually pays, the payment may be less than the agreed amount, or it may arrive weeks or months past the invoice due date.
A contract can provide you with legal recourse when dealing with clients who refuse to pay. Plus, it gives you something concrete to point to when the client is in breach. Having a contract forces clients to take you seriously—and they know that you're more likely to move forward with redress if they try to avoid paying you.
Go the collections route
Some large clients will take advantage of smaller businesses. Don't let the client have the upper hand. There are several cost-effective ways to get a client to pay up. Many small business owners have good results working with debt recovery services. Hounding clients for payment is time-consuming and frustrating. Let a professional handle this aspect of your business while you focus on running your company. Besides, a letter from a collection agency might carry more weight.
Another alternative is small claims court. Find out what the rules for your state are and make sure your contract stipulates using your state for disputes.
Lay out fees for late payment
Your landlord and credit card company charge for late payments. You can, too. As part of your negotiations, make sure you determine when payment is due. It's common to have net 14 and net 30 terms. Put that in the contract and then come up with a late fee. Some freelancers choose to charge a percentage.
So, your contract could lay out that payment is due on a net 14 basis, and you'll offer a three-day grace period. After that, you charge a late fee of $5 per day. Others might tack on a 5% late fee for each week the payment is overdue. Once again, having all of this spelled out in an agreement can help you enforce it later.
Don't let a handful of non-paying clients affect your cash flow. Learn how to recognize non-payers and slow players and use the resources available to get your money.