Delinquent Clients: Getting Paid 101

Cash RegisterThere are a few scary things that you have to face in business. Whether or not you’re going to get paid, and what happens if you don’t, is a big one. Especially if your business in new, small, and strapped for cash.

That’s okay. There’s some things you can do. And for the most part, they’re just part of the normal process of doing business.

Getting Down

If you’re operating a retail store, it’s cash and carry, so no big deal. But a lot of businesses that sell goods or perform services get paid after they deliver. One of the things that you can do is get a down payment.

Getting a down payment up front accomplishes 3 things:

  • It minimizes your loss if you don’t get the rest
  • It helps lock in the commitment of the buyer to complete the sale
  • And it’s a good way to put sales before purchasing

Every industry has it’s own acceptable standards for how much a down payment should be. It could be anywhere from 5% up to 90%. Sometimes the payment structure is multi-tiered like 45% down, another 45% on delivery, and the last 10% within 30 days after the invoice date.

Check around and see what people are doing in your industry. It might be nice to get full payment up front or 90% down, but if you don’t stick to the standard practices used in your industry, it’s going to be a tough sell.

How To Make Sure You Get Paid

It’s all about documentation. And it’s a pretty simple step by step process. Here are the documents you need to generate:

The Quotation

Give your customers a written quotation. Even if you give someone a verbal quote over the phone, email or fax them a written quotation. If there’s some price haggling after you issue the quotation, write up a new one and send that to them.

The Credit Application

Once a customer likes your quote and decides they want to buy from you, get them to fill out and sign a credit app before proceeding any further. The credit app should require company contact info, banking info, and trade references (other people the client does business with). It should also include a standard terms and conditions clause above the signature line. That clause might go something like this:

We authorize your-company-name  to make any credit inquiries about us from time to time and give our consent to disclose information of a credit nature to credit reporting agencies or to persons with which we have, expect to have, or may have, financial dealings.

We agree that our liability for any charges is not waived and agree to be held personally liable in the event that any person that we authorize to charge fails to pay for any part or the full amount of such charges. A charge of 2% per month, but not to exceed the lawful maximum, shall be charged on all overdue accounts. Terms of sale shall be net 30 days. Any account, which is outstanding after (30) days from the date of the invoices, shall be considered overdue. A charge of $25.00 shall be charged to an account for each check tendered in respect of that account which is returned for any reason by the Bank on which it is drawn. The Buyer shall be responsible for all costs of collection, including reasonable attorney’s fees and court costs, incurred by your-company-name in collecting or attempting to collect any amounts owed by Buyer. Your-company-name has the right to close this account after a period of inactivity, or at any time for any reason. Terms and conditions of this agreement may be amended without prior written notice by us.

The Purchase Order

Get the customer to send you a purchase order and document the PO number on all the following documents. If they don’t use POs, ask them if you can use their name in place of the number.

The Sales Order

The sales order is an itemized list of the purchase that includes the pricing and the customers ‘bill to’ and ‘ship to’ addresses. Larger companies also generate a packing slip which is the same as the sales order but without the pricing.

The Invoice

The day a good or service is delivered, an invoice should be sent out. An invoice contains all the same information as the sales order. It just says invoice on it and has the current date. The invoice date is when the clock starts ticking when you give your customers credit so it’s important to get it out right away.

Using Your Paperwork To Get Paid

So you made a sale, all the paperwork is in order, you delivered the goods. And you didn’t get paid. After 30 days, send out a second invoice and talk to the client. Let them know they need to pay their bill. A lot of times they’ve forgotten and they’ll send you a check right away.

If they still don’t pay you, it’s time to remind them about the overdue fees that are going to be charged for late payment. If they’re really stalling, then after 90 days it’s time to send a collections agency after them. Call them and let them know this is going to happen if they don’t pay the bill.

This is where the credit app and the rest of your paperwork becomes really important. Find a good collections agency and hand a copy of the whole file over to them. Collections agencies are relentless. There’s a cost to using them but your clause in the credit app allows you to bill these costs to the tardy client. 

A lot of times the collections agency will get the client on some kind of payment plan and do all the work for you. And it’s better than going to court because litigation is always a 50/50 coin toss.

Hopefully you don’t run into too many situations like this, but the bottom line is, if you’ve never gotten burned in business, you haven’t been in business. Everybody gets burned. It happens. It’s how you guard against it and deal with the situation that counts.

11 thoughts on “Delinquent Clients: Getting Paid 101”

  1. Hey Shane,

    Why have I heard all this before? This really strikes a chord with me as I have such been through similar experiences. And it sure sucks!

    One thing I’ve learnt is that everything must be made clear in black and white at the very start, so as to avoid trouble later.


  2. Absolutely Jag.

    Most of the time, when you have all your documentation in order, you can put some pressure on a customer who might just be delaying payment to help their own cash flow, or might be a little cash short and has to decide WHO’s going to get paid first.

    I’ve also seen people who buy on credit with no intention of paying. When they get cut off, they go buy what they need somewhere else and play the same game all over again.

  3. I am dealing with a delinquent client currently and it is a nightmare. Luckily, the client signed a contract we crafted up and we have the original copy. We called Pre Paid Legal today and we are having a lawyer write the client a letter. Great post and thanks for the information.

  4. Hey Nate,

    Good move. A letter from a lawyer usually helps people return your phone calls when they’re avoiding you. Hopefully this gets the ball rolling in the right direction.

  5. Nice article.

    This is particularly a problem when you are starting out. When I first worked as a freelancer I sank 3 months into a project and got about a third of the agreed fee. Huge company, decided not to complete the project, had a clause in the contract THEY wrote which let them out of paying for anything not completed – even though they cancelled it after 90% of the work was completed.

    Always read the small print. I should have turned that job down on those terms. It probably set me back 6-9 months.

  6. Steve, thanks for dropping by

    I’m kind of involved in something similar. The way to handle it is to have milestones that you define.

    Reach a certain milestone … get a check. If we don’t get a check, then we don’t continue the work for that client until we do. It’s still not absolute, but it helps minimize the damage if a client decides to shut down a project mid-stream

Comments are closed.