Every business will eventually face the unpleasantness of having a client receive the products or services provided by the business, but choose to ignore the bill. First comes the gentle reminder email, then maybe a follow-up call. Weeks can pass into months, and all of a sudden, that unpaid invoice is now impacting your ability to perform the day-to-day functions of your business. The question is not if you will encounter this type of issue; it is how to deal with it when you do.
The unfortunate reality is that payment delays and complete non-payment are far more prevalent than many new entrepreneurs realize. And even established companies with a strong roster of clients will continue to experience this same issue on a regular basis. By understanding the alternatives available to you and which alternative to use when, you can make the difference between getting the money back, and writing it off as a loss.
Internal Collection Attempts
Most businesses begin with attempting to collect from the client internally. This is understandable — nobody likes to escalate an issue that may still be resolved by sending a simple reminder to the client. The accounts receivable team continues to send reminders via email, makes phone calls and attempts to keep the professional relationship intact while also clearly stating to the client that payment is expected.
Internal collection attempts are generally successful for the reasons stated above. Delays caused by the client may occur when the delay is either unintentional or the client is experiencing some form of temporary financial difficulty but intend to make the payment. Large organizations sometimes miss invoicing a client (although this is becoming less frequent). Sometimes, the client’s process for approving payment just takes longer than expected. Generally, a couple of polite reminders will resolve these types of situations and will not damage the business relationship.
The problem is determining when internal collection efforts will be effective. Business owners may spend weeks, and possibly months, attempting to collect on the same invoice, and using employee time and company resources to do so. With each subsequent attempt, it costs money to employees in terms of their hours, and that time could be spent on producing revenue generating activity.
When Internal Efforts Fail
Now things get complicated. As the time elapses that an invoice goes un-paid, the possibility of receiving any payment decreases exponentially. Statistics indicate that the rate of recovery drops significantly after 90 days, and at six months, the possibility of collecting on a debt without outside assistance is extremely low.
However, many business owners are hesitant to escalate the process. They fear that escalating the collection process will damage the relationship with the client, who may eventually pay. They fear that hiring a professional collection service will cost too much money. Most importantly, many business owners simply do not know what other alternatives are available to them except for continuing to send increasingly stern emails.
The consideration that should be taken into account is what the non-paid invoice is costing the business. If the amount is large enough, the business may be covering expenses, paying suppliers, meeting payroll and basically providing an interest-free loan to the non-paying client. That is money that can be invested in the business to grow the business, take advantage of supplier pricing incentives, or serve as emergency working capital for the business.
Professional Collection Services
When internal efforts are unsuccessful, businesses usually seek the aid of a professional commercial debt recovery agency. A professional collection service has the skills, resources, knowledge and procedures to collect outstanding debts while staying within the confines of the law during the entire collection process.
Collection agencies function differently depending on the model they are using. Some operate on a contingent basis and only charge a percentage of the money they collect on behalf of the business. Others charge a flat fee, and/or charge hourly rates. Regardless of the method, the focus should be on the results — what percent of the referred debts do they actually collect, and how long does it take them to do so?
Professional collectors have several advantages over internal collection attempts. They are aware of the laws governing the collection of debts and know what they can, and can not do when collecting a debt. They are experienced in every possible reason a debtor uses to explain why they have not made payment on a debt. Professional collectors can be more aggressive in pursuing a debt without regard to the business relationship with the client, because the business relationship has already been damaged by the failure to pay the debt after months of requests. Additionally, a business contacting the client regarding an invoice it sent may be ignored or put-off by the client. A professional collection agency indicates that the matter has reached a higher level of seriousness and that the debt will not be allowed to go un-collected.
Psychology plays a role here as well. Many debtors who have ignored previous requests from the business will suddenly find a way to pay when contacted by a professional collector.
Legal Action: The Final Option
In some cases, collection efforts may fail even with the assistance of a professional collection service. In such instances, the last resort is to take legal action against the non-paying client. Legal action includes filing a lawsuit, proceeding with the courts, and possibly obtaining a judgment against the client.
Taking legal action is expensive and time consuming. Court fees, attorney fees and the business owner’s time spent dealing with the court case add up quickly. Winning a judgment does not guarantee payment of the judgment — it only creates a legal right to the money. Collecting on a judgment may involve further actions by the business including wage garnishment, and/or placing liens on the client’s property.
Whether to pursue legal action should be determined by the business considering several factors. Is the amount sufficient to warrant the expense? Do the client’s assets provide a realistic opportunity to seize them upon obtaining a judgment? Is there a reasonable probability of collecting on the judgment, or will it simply be throwing good money after bad?
Some business owners will use the threat of legal action to negotiate a payment plan with the client. Upon the client realizing that the business is serious enough to file a lawsuit, they may be more willing to work out a payment plan. This may allow the business to collect a portion of the debt without having to go through the entire legal process.
Prevention: Developing Better Processes
The best strategy for dealing with non-paying clients is to prevent the situation in the first place. While every business will not receive timely payment on every invoice, developing better processes can greatly minimize the number and severity of payment issues that arise.
Clearly defined payment terms establish expectations with the client from the beginning. When are invoices due? What forms of payment are acceptable? Are there late fees or interest charged? All of this information should be included in contracts and reiterated on invoices themselves.
A credit check of prospective clients, especially for large orders, can help identify any potential issues prior to commencing work. Requiring deposits, or partial payment, for large jobs can also minimize the risk of non-payment. Offering a discount for early payment can incentivize the client to pay promptly, instead of viewing the payment as a penalty for late payment.
Following up on outstanding invoices in a consistent manner, rather than haphazardly, can also greatly reduce the number of invoices that ultimately need to be written off as bad debts. An example of a consistent follow-up schedule would be:
Send a reminder to the client via email.
Contact the client via telephone at 45 days past due.
Engage in a more serious conversation regarding payment alternatives at 60 days past due.
Having a system in place ensures that nothing slips through the cracks.
The True Cost of Doing Nothing
Perhaps the largest mistake businesses make is simply accepting that non-payment will always be a part of doing business. Businesses write off bad debts without exploring any avenues for recovering the monies, under the assumption that the cost of collection is greater than the potential to recover.
Many businesses overlook the precedent that is created when clients realize that non-payment will never have any consequences. When clients realize that non-payment will never have any consequences, they will undoubtedly continue to delay, or default, on subsequent invoices. Ultimately, word will spread throughout the business community regarding the business that will never pursue an unpaid debt.
Money Matters Too
Those unpaid invoices represent the work completed, the materials used to create the product, and the overhead that the business incurred. When a business writes off an unpaid invoice, it is essentially saying that the business worked for free, or lost money when considering the expenses associated with completing the project.
What’s clear is that doing nothing shouldn’t be the default option. Businesses that develop clear policies for handling non-payment, implement those policies consistently, and don’t hesitate to escalate when necessary recover far more of their outstanding receivables than those that simply hope clients will eventually pay.
The goal isn’t to be aggressive or unreasonable. It’s to treat the business’s money with the respect it deserves and to ensure that the company gets paid for the value it provides. That’s not just good practice—it’s essential for survival.
