In an ideal world, all customers would pay their invoices almost immediately. If they did, cash flow problems would never materialise and your business would run like clockwork. Sadly, things rarely happen that way and it is not unusual to end up with at least one bad payer on your books. So how should you deal with customers who can't or won't pay?
Customers that refuse to pay cost your business money, so they need to be dealt with as quickly as possible. The best way to do this is to spot the warning signs before they become a major issue and you need to call upon the services of a collection agency.
Tried and tested debt collection steps
It is a good idea to have a clear policy in place for dealing with non-paying customers.
Don’t always assume a customer is deliberately ignoring an overdue invoice. Occasionally, invoices remain unpaid because the customer has overlooked them or the invoice never arrived. A friendly reminder, along with a copy of the overdue invoice, should jog the customer’s memory and secure a payment.
If all you get in return are excuses or even no response whatsoever, it is time to move on to the next stage. Write to the customer again, but be a little less friendly. Give the customer a payment deadline. Let them know that you will be escalating the issue if they fail to make payment within a specified amount of time.
Debt collection agencies
Once a debt is well overdue and the customer is making no effort to pay, it is time to call in the services of a reputable debt collection agency. Most work on a contingency basis so there is no cost unless they actually collect your money. Collection agents specialise in recovering aged debts. They utilise a number of methods to find the customer and secure payment of the outstanding receivable.
If the collection agency is not successful, it may be worth filing a lawsuit. Taking legal action on your own or with your regular attorney can be expensive. Many collection agencies have attorneys who also work on a contingency basis which can dramatically lower your investment. If the likelihood of getting paid and the amount owed is high enough to justify the investment, don’t hesitate to sue.
Prevention is better than cure
Bad debt is an inevitable part of running a business. You can’t always prevent customers from paying their bills late, especially if they are having cash flow problems. However, you can minimise the disruption bad debt causes the business by reducing the chance of it happening in the first place.
One way to weed out bad payers is to perform a credit check on any new customer. This will give you an early warning system in the event a customer has previous form for non-payment of debts. Next, always agree payment terms up front and make sure the customer is fully aware of how much the service/project is going to cost.
If you have any concerns about the customer’s ability to pay their invoices, ask for a down payment upfront and always invoice as soon as you complete the job.