Small Business

Dealing with Clients Who Refuse to Pay for Work Done

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By Next Insurance Staff
Jul 9, 2019 min read

It can happen to anyone. In fact, it’s one of the things that freelancers, independent contractors, and business owners alike fear most – dealing with clients who refuse to pay. Protecting yourself in the first place, of course, is your best line of defense. However, while you may have business insurance, it won’t cover instances like this. That's why it’s so important to work with contracts, keep track of your income, and manage your business accordingly.

Protect Yourself with a Contract

One of the biggest risks involved in running your own business is dealing with clients who refuse to pay. To protect yourself, you need to begin with a signed contract. Why? Because a signed contract is a binding agreement between you and your customer. It spells out the exact duties of each party – that is yours as the service provider, and theirs as the recipient. If you’re looking for answers as to how to ask for payment professionally, it begins with a legal, binding contract.

This means your contract should include:

  • Your business name and the client’s full name, plus full contact details for each.
  • A detailed outline of the services you will supply, as well as the timeframe in which you will be giving these services.
  • The full price of your services, which can be your hourly rate plus any applicable taxes, or the flat fee you will be charging. If it is not a single flat fee, you will need to be very clear on how your hours and materials will be billed.
  • A payment schedule for the client. This can be a single date by which you will receive your payment in full, or it can be broken down into different dates, based on agreed upon milestones.
  • Signatures of both parties and the date.

You can find sample customer contract templates online, which you can use to write your own. However, if you are working with customers on a regular basis, it may be worth consulting with a lawyer to write one up in a manner that best suits your business needs.

Ways to Mitigate the Effects of Payment Delays

While some clients will bail on their bill, some clients simply require an overdue payment letter to get them moving. Either way, as an independent contractor not paid for work done you need to plan accordingly. So what can you do?

First of all, you need to keep track of your business income and work accordingly. This means not budgeting down to your very last cent. Instead, take into account that in all likelihood, there will be a couple of duds along the way – and their bad faith shouldn’t break the bank for you. In other words, you need to operate in a way that reflects the reality that your business income may well be less than the combined total of what you billed. And while general liability insurance is great for a lot of things, keep in mind, it won’t cover your risks or potential losses here.

If need be, you can hire an accountant for assistance. You can look at it as a type of consulting insurance if you will. They can help you implement better policies to protect your business and make suggestions for lowering your risks like security checks and tighter credit requirements. Some might even do collections for you. Plus, they'll be able to spot potential tax savings.

The bottom line is that as a business owner, you need to keep track of the money coming in and going out. But since there are going to be customers who renege, you can’t count all of their money before it’s in-hand. Hence your spending has to be accounted for as such.

Reasons for Not Getting Paid for Work I Have Done

It is estimated that as many as 80% of small-to-medium sized businesses suffer from late to non-payment from customers. So if this has happened to you, don’t feel bad. You are totally not alone in dealing with clients who refuse to pay.

Late or non-payment, of course, can happen for a number of reasons. For example, a customer may be dissatisfied with your work and choose to withhold payment until you fix something. This may or may not be a legitimate tactic, depending on your contract. In other cases, you may encounter a customer who is short of cash his or herself. In this case, you may need to nag to get yourself moved up their priority list. And finally, there are those customers who are just jerks. That is, they’re the type of people who think rules don’t apply to them, and when possible, simply don’t pay their bills.

What to Do if a Client Refuses to Pay

While you can always call up a client who refuses to pay, getting all interactions in writing is always the better way. There are two main options here:

  • Write a very clear email and reattach your contract – How to write an email to customer for payment is pretty simple. Be clear and calm, courteous but firm. Outline the facts stating the work you have done, when payment was due, and a reminder of the full amount. You can add a scanned copy of your contract if you have one as a legal reminder. Feel free to send such an email more than once, and follow up with a call. Just wait a few days in between emails to give them time to respond. You can also escalate by sending the invoice up the ladder at the offending organization (say to your contact's boss), as the weeks pass.
  • Official payment request letter to client – If you’re working with a lawyer, they can send an official payment request letter to client, which should do the trick. While this is an excellent scare tactic, it's usually best to try on your own first. A legal letter may be a bit heavy-handed for a first-time offender, or someone who's just a little past their pay date.

If neither of these methods work, you may want to consider legal action. If you have a signed contract and you kept to your part of the terms, you could have a good case. Even if you don’t have a signed contract, but have strong proof of intent – like a long line of emails in which you discuss terms – you may be covered as well.

Final Thoughts on Dealing with Clients Who Refuse to Pay

Keep in mind, when dealing with clients who refuse to pay although you may be angry, you need to consider if the legal process is worth your while. Pride certainly has its place. But the hassle of court may not be worth your time. This is especially true if you’re talking about a small amount of money that you’re owed. So be realistic, and think about your end goals and investment as well. Sometimes it's better to simply let it go, and get on with business, a little wiser for the wear.

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By Next Insurance Staff
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