Owning your own business can be a lot of fun, but there’s one aspect that no business owner likes: Trying to collect from clients who have run short of money. Unfortunately, wringing money out of deadbeat clients has been a common issue for many small firms since the recession. The National Small Business Association’s 2012 Access to Capital Survey found that 21% of businesses found that clients were taking longer to pay them than two years earlier. A growing number of owners are seeing payments take longer than 30 days, according to the survey. “It’s a tough problem, especially in recessionary times,” says attorney Andrew J. Sherman, a partner in the Washington, D.C. office of Jones Day.
In some cases, you’ll have no option but to hire a collection agency or go to court to collect, but many small business owners don’t like to go this route routinely. The NSBA’s survey, for instance, found that just 17% report nonpayments to collection agencies.
Often, it’s easier to take a proactive approach by avoiding the types of clients who usually spell trouble, staying alert to signs that long-time customers are having financial problems and taking quick action when their payments are slowing down. Here are some tips from entrepreneurs and experts on how to keep your business thriving, even if clients hit hard times.
See also: 5 Crucial Steps to Renegotiate a Client Contract
Vet clients carefully. When you’re building a business and need revenues, it’s tempting to take on every customer who wants to work with you. But that’s often a route to collection problems later. To avoid that scenario, Susan Baroncini-Moe, a marketing strategist in Indianapolis, Indiana and author of the upcoming book Business in Blue Jeans, recommends screening clients carefully.
Doing a credit check on a client can be a valuable step, but it’s not failsafe. “In this economy I don’t think a credit report is a good indicator,” says Baroncini-Moe. “Things can go south so quickly.” She recommends paying attention to the comments a potential client makes when discussing money in your initial conversations. If, say, you routinely charge a certain monthly fee for your work and a client tries to start a negotiation by offering half of that, it’s not a good sign. “We may have a situation where a client can’t afford the service I am going to deliver or can’t afford the quality of service I want to deliver,” she says.
A client who doesn’t understand the true value of the work you do may also be reluctant to pay you in full, even if he isn’t in financial trouble, so screen these folks out, too. Baroncini-Moe sees it as a red flag if, in an initial conversation, a potential client seems to have cut corners on marketing in the past, by, for instance, purchasing social media followers. “To me that’s like cheating, and doesn’t work anyway,” she says.
See also: When A Customer Trashes You Online
Stay on top of financial paperwork. It’s easy to fall behind on invoicing if you’re in the midst of big projects, but letting it slide for a month or two will put your business at risk. “Before you know it, a client owes you $5,000, $10,000 or more,” says Sherman. To avoid this problem, Aruna N. Inalsingh, who runs Ani Marketing Service in New York City, establishes regular routines for billing her clients that reflect their preferences, such as sending an invoice every two weeks. If clients start taking longer than usual to pay her, Inalsingh, who has been in business since 2001, notices it immediately. “Pay attention to the patterns,” advises Inalsingh.
Read the tea leaves. Most entrepreneurs know that they’ve got to put contracts and payment terms with all clients in writing. But that won’t always protect you if a client runs into financial problems. “They’re not likely to start paying you because you have a contract,” says Sherman. And if you’re dealing with a long-time client who has hit a bump after many years, you may not want to take them to court to enforce a contract, anyway.
Staying alert for signs that your customers’ financial situations are changing can protect you from having to do so. If, say, you usually have a monthly conference call and a client puts it off once, that may not mean anything. But if he’s postponed it three or four times, and his last payment was late, it could mean he can’t afford to work with you as frequently—but hasn’t gotten around to telling you. Other signs of potential trouble are sudden changes in the scope of projects or turnover at a firm that’s been a client, says Baroncini-Moe.
See also: 5 Types of Toxic Clients–and How to Manage Them
Be direct. No one wants to bring up a client’s financial problems, but if you want to survive in business, sometimes you’ll have to. When one client’s payments started slipping, Inalsingh asked him for a check at their next meeting, just before Christmas. He couldn’t pay her at the time. When, the New Year came, and he still hadn’t paid her. She couldn't keep working for a client who couldn't pay, but she didn't want to cut him off completely. So she scaled back her hours for him significantly for a while. He’s now almost caught up on paying her, and their relationship is intact.
Insulate yourself. Depending too heavily on one or two clients puts your business at risk if payments from one of them slow—or dry up. Even if your plate is full for the moment, Baroncini-Moe recommends continually looking for new clients and, if you get too much work, adding them to a waiting list. “Make sure you have a constant inflow, so if one client falls under and isn’t able to pay you or pay you on time it doesn’t become a problem for you as a business owner,” she says. You’ll have more freedom to work things out with good clients who’ve run into trouble if you aren’t depending on any one of them to pay your electric bill this month.
Elaine Pofeldt is co-editor of the $200KFreelancer, a website that aims to help self-employed professionals earn a good living.
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