What to do when clients refuse to pay for work

What to do when clients refuse to pay for work

Kim Mercado
By Kim Mercado
Mar 9, 2022
9 min read

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 lessen 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?

Set expectations with clients from the start

As the old saying goes: “An ounce of prevention is worth a pound of cure.” This means that a little effort upfront can be a good investment.

Clearly state your payment terms before working with new clients whether they are 30 days net, due upon receipt, etc. 

You also might include a policy on late fees of penalties which can act as a negative deterrent for missed payments or unpaid invoices.

Reward good behavior

Some clients will respond better to positive reinforcement than negative. You might offer a small discount to those who pay within a certain period of time (e.g., three days from invoice issuance) or who pay in cash. 

Track your income

First, you need to keep track of your business income and work accordingly. This means not budgeting down to your very last cent.

As a business owner, you need to keep track of your money by managing cash flow. But since there will be customers who stiff you, you can’t count all of their money before it’s in hand.

Plan for the worst 

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.

Offer payment flexibility

Some clients don’t mean to stiff you but may have cash flow issues. You might offer getting paid in installments or work out a deferment plan if you feel the client has been transparent and communicated with you.

For clients who have had payment issues in the past, you might ask for payment upfront on a trial (or permanent) basis.

Seek professional advice

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, an accountant will be able to spot potential tax savings.

Reasons why clients refuse to pay

According to a recent survey by B2B payments company Melio, 59% of small businesses have direct experience with late payments with 25% having to wait between 20-30 days past the payment due date. 

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, 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 a client refuses to pay?

No business owner wants to do the time-consuming task of chasing down money, but you’ll need to if you want to get paid. While you can always reach out to a client with a phone call, getting all interactions in writing is always better. 

There are several steps you can take:

1. Write a very clear email and reattach your contract

First, try writing an email as a friendly reminder 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 refuse 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 so think carefully about this method.

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 professional debt collectors 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. 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

Everything is online, so you can get an instant quote, review options and buy coverage in less than 10 minutes. You’ll have immediate 24/7 access to your certificate of insurance (COI) as soon as you buy your insurance.

Get an instant quote today to get started.

What to do when clients refuse to pay for work


kim mercado
About the author
Kim Mercado is a content editor at NEXT's blog, where she writes and edits posts for small business owners. She is an experienced marketing professional and loves helping entrepreneurs solve their business challenges. You can find Kim trying new recipes and cheering the 49ers.
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