5 tips on what to do when a client doesn’t pay

May 06, 2020

What to do when a client doesn’t pay

It’s been over a month, the invoice is due but your client is ghosting you and you have no idea what to do when a client doesn’t pay – a tale as old as trade. Truth is, it can happen to anyone, regardless if you’re inexperienced or seasoned. 

Some business owners learn how to collect money from clients the hard way. However, you get the privilege to learn from their mistakes and be prepared when a situation like this happens, because trust us, it will at some point. Especially in an economic crisis like this, when everyone is facing a shortage of cash.

Several entrepreneurs who learned their lessons the hard way were willing to share their insights and tips on dealing with clients who refuse to pay. There were some radical answers involving baseball bats, but we left them out and you should too.

5 ways of dealing with clients who refuse to pay

As we all know, money makes the world go round. So when a client won’t pay, you’re risking being late on a mortgage payment or disappointing your child because you need to cancel the trip to Disneyland. There are quite a few important things that depend on your clients paying their invoices on time. 

Here are the best ways of dealing with clients who refuse to pay, so your world can keep spinning round and round.

You catch more flies with honey than with vinegar

The most important thing is not to let a customer’s debt build up too much, keep them paying regularly and put them on stop if they are outside your business terms. Nobody likes a BIG bill and if a customer hasn’t paid for 2 or 3 months, sometimes longer, the amount owing can be very unpalatable for a client to pay or just make them question your service altogether. 

Putting clients on retainers works as well for us as using direct debit and you can even do it through an online payment service, but the best way to get paid is to take the matter to the top, straight to the business owner, often business owners aren’t aware that their accounting department isn’t keeping on top of payments and once you get the MD involved things tend to get sorted out much more quickly. 

Don’t take any excuses either, many accounts departments will say ‘we haven’t seen the invoice’ – it’s always a good idea prior to the end of the month to call and make sure they have the invoices in a polite conversation. I’ve always said you catch more flies with honey than you do with vinegar and asking nicely goes a long way further than beginning with threats of a court action which always becomes protracted and ruins future business goodwill.

Simon Young, Managing Director at Institution

Nurture your client relationships

We try to maintain our client relationships so they feel a bit more valued. This can be done by simply checking up on them every now and then, helping them with a problem they may be experiencing or even by featuring them in our content in some way.

In the past, we’ve worked with not so reputable brands so we decided to deliver the work only after we were paid which worked for us.

For those clients who are genuinely struggling, we have offered payment plans to help them pay off their debts.

Paul Gibbens, Marketing Executive at Housebuyers4u

A stitch in time saves nine

Plan ahead – When dealing with a client who refuses to pay, the situation is evolving rapidly so it’s important that you continue to have a good idea of where you stand amid all of the uncertainty. Keep updating your cashflow forecast as new information becomes available, and pay particularly close attention to your list of debtors. 

Keep in touch – Stay in contact with your debtors to find out how they’re getting on and to anticipate any potential problems. Regular communication can also help bolster your relationship with your clients, which is particularly important at a time of financial stress. Our experience suggests that the old adage of a stitch in time saves nine is particularly relevant when it comes to debtors, as a tricky conversation early on can prevent a potential issue from snowballing into something much worse.

Be firm – Make sure that you’re very clear in your conversations with debtors. If you’ve delivered on your side of the contract, the default position remains that you should be paid – and paid on time. Cash is king in the current economic climate, so try to resist the temptation of writing off (or waiting for) what you’re owed. It’s also worth remembering that delays to payments by your debtors could risk a knock-on effect further along the supply chain, as you may then struggle to pay your own creditors on time.

Be fair – The reality is that many businesses are going to face pressures on their cash flows, so consider introducing some flexibility when dealing with some of your most trusted clients. If you have a good understanding of your financial position (see point 1 above) and have spotted potential issues early (point 2), you may be able to agree on an alternative repayment schedule with some of your debtors.

Chris Clay, Managing Partner at Escalate

Reward good customers, rather than punishing poor ones

Every client should be dealt with in a different way, depending on your relationship with them and their account history. So good Credit Control requires knowledge of these things. You can even avoid delayed payment issues if you establish a good working relationship with them and reward that behavior. However, the answer to what to do if a client doesn’t pay (consistently late or non-payment) is below:

Talk to your customer, and try to find a solution. Their reason for not paying needs to be understood, whether it is a dispute or they are struggling financially. You need to ascertain their reason before anything else. More often than not the answer is simple (i.e. they did not receive the invoice, or it was sent to an old address). Communication is KEY!!

After communication, organisation is also very important. A good Credit Controller knows the customer’s account history. They should read old communications and emails, AND ask colleagues about them. Customer information should always be up to date. There is no excuse for it not to be. Ensuring this removes most non-payment reasons. It is amazing how easy it is to improve collection stats, purely by being pre-emptive and getting organised.

Withhold your company’s services until payment is received if the above two points are managed and followed correctly, but the client is still refusing to pay the invoice or continues to be late. This is the fairest option but should be done under caution, and without unfairly impacting your customer’s business (to maintain the best possible working relationship with them). Always get permission from management first!

Charge interest on invoices. This is legally enforceable, and you have a right to do this. It is known as ‘statutory interest’, and is calculated at 8% (after the invoice is due, accumulated daily from then on) plus the Bank of England base rate. So each year from the due date, an invoice accumulates 8% interest). Should a debt reach debt collection or Small Claims Court, always ensure this interest is properly calculated, and add it on.

(You can enter a clause in a customer’s contract, whereby they agree to pay interest should an invoice be paid late).

Similarly, offer early payment discounts. Perhaps 5% if an invoice is paid within a week (rather than the agreed 30 days). This gives you immediate cash in the bank and rewards good customers, rather than punishing poor ones.

Threaten debt collection. This option is only for use with clients who you assume will no longer be a customer, as it is the harshest option and will usually spoil any remaining working relationship. Think it through thoroughly and ensure all other options have been exhausted, and that you have permission from management.

Before sending the debt to a debt collector, you will have to warn the customer with a Letter Before Action (LBA). And you will need to do your research with debt collection agencies, to find the right fit for your company. Debt collectors will only ever have a certain level of success, but you will need to go through this process before the Small Claims Court procedure, or another legal action is commenced, to prove you have done everything you can to collect the debt.

Consider the Government’s Money Claim Direct option. Well worth investigating if you have not heard of it. They charge, but it adds weight to your argument for collection and shows you mean business. (Their fees are added to the debt, on top of interest)

Paul M. Jones, Credit Controller PJS Credit Management

Get in touch with the person in charge

Be nice. It might be tempting to scream down the phone “where’s my money?” but don’t. If they do intend to pay at some time, being polite will help speed things up.

Find the right person. One of the most important things to do when a client doesn’t pay is to check who actually makes the decision as to when payments go through. Is it the person who issued the order, or the finance person? If you’re not sure, ask.

Help them pay you. If a client won’t pay, maybe give them a gentle reminder, a reason to pay you. Detail what you have provided, check there are no issues with the invoice, make sure they are satisfied with what has been delivered.

Check your contract. Make sure your payment terms are clear, simple and protect you. Set out exactly when you expect payment. Detail late payment fees.

What next? You can consider:

  • If emails are ignored then call.
  • Offer payment by installments – 50% now, 50% next month.
  • Letter before action – low cost (around £5 from solicitors or debt collection companies).
  • Statutory demand – a bankruptcy threat.
  • Money Claim Online – start litigation online (but read the guidance first).
  • Invoice factoring – sell on the invoice to a third party.

Susan Francombe, Founder of The Business of Building

Conclusion

When it comes to dealing with clients who refuse to pay, it is important to remember that every situation is unique on its own and has to be carefully reviewed before any action is taken. For what it’s worth, long-time, loyal clients cannot be approached the same way as one-time clients. You don’t want to break a good work bond because of one late payment. When a client won’t pay always try to work things out with a civil conversation. However, if things get out of control remember that in these types of situations, the law is on your side.

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