Small Business Challenges – What Happens When Clients Don’t Pay?

There are constantly challenges to running a small business.  Most are just irritations; some are really a pain. The time when a client refuses to pay, falls into the later category.

Recently, a Markatalyst client would not pay for services they requested.  We had a contract.  We had email documentation.  We had proof that the work was completed.  Our financial systems sent an “auto-reminder.”  We left voicemail messages.  We sent a strongly worded letter mentioning the possibility of a law suit.  Still, we had no payment.

Hopefully, other small business owners will never find themselves in such a situation.  For those of you that do, the following steps may be of use:

  • Be Fair – Be fair and accommodating, whenever possible. Clients are hard enough to find and you don’t want a reputation as hard to work with.
  • Stop Any Work in Process – If the client does not have the decency to pay you for work already completed, how can you be sure they will pay for future work? Contact your client immediately and explain that you cannot do any additional work until all invoices are paid in full.
  • Send a Reminder – You client could have forgotten, misplaced, or lost your invoice.  Once the due date for payment has passed, email or call with a gentle reminder requesting information about the status of payment.
  • Send Additional Reminders – If no payment has come after the first reminder, it is time for another email or call. Explain to your client that cash flow is very important to your business and that you cannot afford to carry the unpaid invoice any longer. Send an email reminder or statement every other day or once a week to ensure that you are at the front of your client’s mind at bill paying time.
  • Use Legal Remedies – If after multiple reminders no payment has arrived, set the precedent that your company does not tolerate deadbeats. Have your attorney send a demand letter stating that if you are not paid in full within a certain period, that you will take the client either to court or to arbitration, depending on the contract you have in place.  If your contract stipulates a court proceeding, you have a choice of small claims court for smaller amount (up to $5000 in California) or to superior court for larger amounts. Debt collection cases are usually simple and few collection cases actually make it to trial as most defendants either settle before trial or fail to appear in court (in which case you would receive a default judgment).

Chances are if you threaten legal action, your client will pay. If he does not, you may have to follow through with a law suit. When making this decision, remember to consider the amount owed, your time for the legal action and whether or not you ever wish to work with this client in the future. Note that if the client never pays you, you may be able to deduct the amount as a “bad debt.”

Above all, remember that you should be paid promptly for services rendered and accepted – you didn’t go into business for yourself to work for free.

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