There is nothing I hate more in business than collecting money that is owed to me. It is one of the most uncomfortable parts of business. Every time I have to collect money from someone who is slow to pay or avoids trying to pay, I wish I had someone like Tony Soprano on my payroll.
I have no problem if someone is having trouble paying his or her business isn't going well, as long as the person alerts me to the delay. Few business people go through life without going through dark times. It's the nature of business.
What sends me into a rage is when people won't return my calls or make promises they have no intention of keeping.
What can you do to reduce your chances of not getting paid? There are two things I recommend: Be selective on the clients you accept, and be willing to take action.
Few business people have so much business that they can afford to be choosy. If you have been in consulting long enough, you try to bring in all the cash you can when the market for what you do is hot. For retail and wholesale businesses, it's hard to get to know and screen out potentially bad clients.
Here are some ways to pick your clients, if you are in the position to be selective.
- Referral: I like referrals because the prospective client has been vetted by the referring source. Only once in 12 years has a referral not paid his bill.
- Internet search: Go on the Internet and do a search using the person's name and another using the business's name. Go about six levels deep and you should find out everything you need to know. I once found three lawsuits for nonpayment buried on the Internet.
- Better Business Bureau: Every major city has a Better Business Bureau. This is a good source to get information on a company you know little about.
- References: Ask prospective clients for the names of vendors they have worked with and for the names of their accountants and law firms. Usually, they will provide names of vendors they have paid on time, and even the worst payers always have three companies they use to leverage everyone else they deal with. What you are hoping for is that you will know some of those vendors or professionals who work with them.
There are also different types of clients to avoid:
- "You'll get your money": I have had clients offer me more than I requested if I would wait to collect. They claimed that they were closing on a new round of investment or that one of their big clients was planning to pay them later in the week. I have learned from experience that you would be lucky to collect part of what is owed you by these clients, let alone what they originally promised.
- Halfway there: There are clients who are willing to pay half up front -- which is great and something you should insist on -- but some of these people are assuming that the work you do in the first half will be enough that they can finish it and avoid paying you the rest.I've had this happen to me, but I was warned by the accounting firm that brought me in. So I charged enough in the first half to include my profit in the event the client refused to pay the rest.
- Inexperienced husband-wife teams: The most dangerous group you could work with. I avoid working with husband-and-wife teams, because one of the two spouses is usually afraid to tell the other when they are wrong.
Getting What's Yours
. You should have a signed agreement that specifies
- exactly what you are responsible for
- exactly what the client is responsible for
- due dates for payments
- penalties for not paying
- how disputes will be settled
. You should always get half of any agreement up front. Make sure that the first half of payment includes all of your costs.
. Don't do anything until you are paid. All too often we want to be good, cooperative vendors and give our clients the benefit of the doubt. Unless you have worked with the client for a long time and have established a level of trust, don't take the risk.
. If a client isn't paying his bill, send him several written warnings and a last warning by certified mail.
. Don't hesitate to take a client to small-claims court if the amount is worth more than the time you would spend litigating it. Suing someone should be a business decision, and emotion should be removed. Sometimes you need to take a client to court just so everyone knows you can't be walked on. I once made the mistake of not taking a client to court and have regretted it to this day.
Finally, keep in mind that not all debt is collectable. You have to assess whether it is worth the time and cost it takes to collect. All businesses at some point get desperate for business, but you have to restrain yourself from taking on bad risk. Trust your gut, which I find to be more accurate than any financial report or referral you will get.
Marc Kramer, a serial entrepreneur, is the author of five books and is an instructor at the University of Pennsylvania's Wharton's Global Consulting Practicum, where he serves as Country Manager for Chile.