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.
A signed contract is a binding agreement between you and your customer. It spells out the exact duties of each party — yours as the service provider and theirs as the recipient. If you’re looking for answers on how to ask for payment professionally, it begins with a legal, binding contract.
Your contract should include:
- Contact information. Your business name and the client’s full name, plus full contact details for each.
- Bill of services and time. A detailed outline of the services you will supply, as well as the timeframe in which you will be giving these services.
- Full payment rate and terms. This 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 upfront on how your hours and materials will be billed.
- A client payment schedule. This can be a single date you will receive your final payment, or you can break it down into a payment plan based on agreed-upon due dates and milestones.
- Signatures. This should include 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 regularly, 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 non-paying clients will bail on their bills completely, some clients who refuse to pay simply require an overdue payment letter to get them moving. Either way, as a business owner waiting on outstanding invoices, 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 there will be a couple of times you won’t be able to collect payment. The client’s bad faith shouldn’t break the bank for you.
In other words, you need to operate assuming that your actual business income might be less than all your combined billings.
If need be, you can hire an accountant for assistance. 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.
As a business owner, you need to keep track of the money coming in, going out and your bottom line. But since there will be customers who stiff you, you can’t count all of their money before it’s in hand.
Reasons why clients refuse to pay
It is estimated that as many as 80% of small-to-medium-sized businesses suffer from late payment or non-payment from customers. So if this has happened to you, don’t feel bad. You are not alone in dealing with clients who refuse to pay.
Late or non-payment, of course, can happen for several reasons. For example, a customer may be dissatisfied with your work and chooses 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 with cash flow issues. In this case, you may need to nag them to get yourself moved up their priority list.
And finally, there are those customers who are just deadbeats. 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 clients refuse to pay?
While you can always reach out to a client with a phone call, getting all interactions in writing is always better. There are two main options here:
1. Write a very clear email and reattach your contract
First, try writing an email to a customer for payment. Be clear and calm, courteous but firm. Outline the facts stating your work, when full 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 to hold up their end of the bargain. 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.
As the weeks pass, you can also escalate by sending your invoicing up the ladder at the offending organization (say to your contact's boss).
2. Send an official payment demand letter to clients who refuse payment
If you don’t receive a response from the email, you can try this tactic. If you’re working with a lawyer, have them send an official payment request letter to the clients who refuse21
to pay, 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. This tactic also tends to strain your working relationships, so you likely won’t have future work from this client.
3. Take stronger action
If neither of these methods works, you may want to consider legal action. If you have a signed contract and 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.
You may also consider hiring a debt collection agency to recover lost income. Having delinquent accounts can take a toll on your business. If you have several clients past due, it may be helpful to have professionals help you prevent losses.
Of course, both options will cost more than sending a letter, so they're more of a "last resort" option when other tactics fail. You may be angry, but you need to consider if the legal process is worth your while. The hassle of small claims 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. If it’s not a lot of money, sometimes it's better to simply let it go and get on with business, a little wiser for the wear.
Protecting your business with NEXT Insurance
While business insurance can’t magically get your outstanding invoices paid, it can protect your businesses from other financial losses — including legal costs.
NEXT is a one-stop shop for helping self-employed professionals and small business owners find the right insurance at affordable prices. Since we only help business owners like you, we can create a customized insurance package tailored to your exact needs.
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