As a small business owner it is important to set strict guidelines for yourself, especially when it comes to receiving payment from your clients. This can be a semi-uncomfortable situation for new business owners when working with their first few clients, and maybe still difficult for business owners with years of experience. It comes down to “Should I mention their payment is overdue?” or “Should I give them more time?” While this decision is ultimately up to you, it is worth considering other options that can avoid or mitigate the issue of non-payment altogether.
There are a few more drastic avenues you can take when your client is not paying for your services: seeking legal help, sending out letters, and so on. However, a great way to address non-payment is to prevent it before it happens.
1. An Ironclad and Detailed Contract.
Of course The Legal Paige would recommend a solid contract; I love nothing more than a contract that saves small business owners from running into troubles. All jokes aside, a contract must have very detailed information regarding a payment schedule as a way to avoid nonpayment problems. A payment schedule is a part of your contract that sets out your expectations for payment and when funds are due. In this “fee clause” (as we here at TLP like to call it) you should consider a few things: non-refundable retainers, specific dates of when certain portions of the full fee are due, late fees (and specific penalties for being ‘x’ amount of days late), additional fees owed beyond the original scope of services, and deadlines. Retainers are a common way to ensure you are receiving a good portion of your payment just in case the clients stop payment later on, cancel/reschedule, and to allow you some ‘liquidated damages’ for booking the date on your calendar and saying no to other clients. This is often seen as 25-50% of your total fee being paid immediately as the non-refundable retainer with the remaining balance to be paid on either (1) certain dates throughout the duration of your contact (aka installment payments) or (2) at a certain period of time near the end of your completion of services (for example, many wedding vendors have the final balance due 30 days in advance).
Late fees are also a great way to incentive on-time payments as your client is less likely to miss payment dates if they know they will owe their balance PLUS an additional fee. You should remember to include specific dates that payments are due and deadlines that you need to stick to. It is important that your client sees you are holding yourself accountable for getting your work done on time so they feel confident in paying you on time. Do not forget to include the specific work that you will be doing throughout the process so there is no question as to whether you are completing the job as promised. The key here is to send out frequent and consistent reminders of payment due dates to your clients and give them information related to late fees in advance so they hopefully make their payments on time. Then, if they are late on payment according to your contract, you immediately need to send them the updated invoice with the payment due plus late fees included. If you don’t send this updated invoice and include the late fees right away, you have essentially waived that provision in your contract and it is incredibly difficult to go back later and try to enforce it.
2. Do Your Research!
When signing a client, you should evaluate the amount of time going into the project and have an idea if your projected clients are likely to pay on time. It is common to speak to other small business owners about their policies on late fees and taking payments to get an idea of how you want to structure your payment schedule. For example, if you notice that you are taking only 25% retainer whilst other businesses in your industry are taking 50% retainers, it might be necessary to bump your percentage up. Next, you should evaluate the work that needs to be done and in what time frame. If the contract is worth significantly more than your other services or is during a busy season, you should factor that into your overall costs and likely upcharge a bit. For example, if you are a wedding photographer and a client books you in the middle of the busy season and then the client stops paying or cancels, you have now lost a significant amount of income and probably missed out on booking with someone else. Always consider these factors when signing a client; do your research!!
What to do if the client still does not pay!
You took all precautions to avoid nonpayment and yet your client still is not paying and is avoiding all invoices (with late fees!) that you send them. As mentioned, the retainer fee is your saving grace here and will alleviate some of the costs. But, there may be instances where you still deserve to be paid more for the work you’ve performed up to that point. Here are the steps you should take if this occurs:
- Be adamant about sending out invoices and contacting the client,
- Stop working until you are paid, and
- Seek legal help.
Be Adamant About Billing and Contact!
It is important to regularly communicate with your client when they fall behind on their payment. If you do end up having to pursue legal action, it will greatly contribute to your claim if you have consistent contact and invoicing statements. This will serve as evidence and proof that you did indeed contact them many times. It is a good idea to send out a bill showing the current balance AND a notice specifying the unpaid balance. By having two separate documents, you are showing that the client is still being charged and has an overdue balance that needs to be paid. You should further contact via email, a secondary phone, attempt an in-person meeting if possible, and consider sending a certified letter with the invoice to ensure the documentation was received.
When entering your contract your clients agreed to pay for your services. If you are not being paid for your work then you should not continue to work. Do not work for free!! For example, sometimes website designers understand that their client is behind on payments but they want to meet their deadlines so they keep working with the belief the client will pay once they see the finished product. But what if this does not happen?! Now you have put yourself in the position to eat the costs associated with your work and have likely lost other business opportunities in the interim. DON’T DO THIS! Just stop working all together and inform your clients that you are stopping immediately until payment is made. Remember, if your clients cannot make a payment due date then it is not your responsibility to meet the set deadlines in your contract because your client breached the contract first!
Seek Legal Counsel and Send Out Letters.
This is by far the most undesired choice for many business owners; it takes time and costs to hire a legal professional. However, when you are losing thousands of dollars due to a broken contract then you may not have any other option. You should include legal fees in your contract stating that the client will be held liable if legal counsel is needed. Additionally, you should immediately have your attorney send out a “Final Demand” letter, stating that your clients have a certain amount of time to pay their undue balance before taking them to court and/or collections. You do have the option of sending these letters out without legal counsel but this can extend the payment process and leave you still needing help. When a lawyer sends these letters for you, it holds more weight and is likely more threatening to clients to pay their balance which is the entire goal.
Let’s be honest, the potential that a small business owner will run into late payments or nonpayment is likely to happen. You should always put your business first and stick to your standards when a client falls behind on payments. It is not your responsibility to constantly ask your clients for overdue payments. That is why you have a contract laying all these payment policies out from the get-go. Remember, you do not have to continue work if payments are not being made AND you should be confident in asking your clients for payment if they fall behind.
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.