Freelancers and small business owners often face a familiar dilemma of working for one’s self: What do you do when a client doesn’t pay. For freelancers, who often live from assignment to assignment, this can be a major hit to their pocketbooks. And for small businesses who depend on their clients’ payment to generate revenue to pay employees and bills, a client failing to pay on time can affect more than just the business owner. Making matters worse, often freelancers and small business don’t have the resources or time to chase after bad debts.
“Clients not paying or not paying on time is a tremendous problem, especially for small businesses, because you still have to run your business and pay staff on time,” small business owner Tyrha M. Lindsey-Warren of L.A.I. Communications pointed out. “When you work with corporations, they sometimes have a 60- to 90- to 120-day payment period. And don’t let your invoice be incorrect in any way, that will surely delay your payment even more. On the other hand, when you work with other small businesses, they can be unstable too. As a growing business, I always find this to be an issue.”
So what exactly do you do when this issue comes ahead?
“Honestly, my response to this question has evolved over the past 10 years, Lindsey-Warren explained. “Running a marketing and public relations firm is a ‘service business.’ We don’t produce actual widgets per se. Instead, our end product is our intellectual property, which results in the creation of innovative campaigns, research, promotional materials and the like for our clients. Therefore, in the early days, it was sometimes difficult to articulate our value and pricing to clients and I really stressed out when clients didn’t pay us on time. I put on my ‘accounts payable’ hat and was very assertive with our clients in getting our payments. On one or two occasions, I had to take a few clients to small claims court to get our payment.”
Going to court can be very time-consuming, but sometimes suing is the last resort. If you do sue, you will have to be armed with proof such as receipts, contracts, and any communication between you and your client showing you are owed a debt.
“Unfortunately I had to sue a client who not only did not pay his final payment but also bounced a check on me as well, explained Angie Hancock, owner of Experience Harlem, a resource portal for the historic New York City neighborhood. “Fortunately, I had a contract and documentation of the work that was done. Once the case went to court the client used various tactics to obtain extensions until finally, the judge ruled in my favor. Even after winning the case it still took months for me to collect. After over a year of going back and forth to court and the sheriff’s office, I was able to quickly obtain the money that was due to me once the sheriff served the lien against his bank account.”
Christine White, managing attorney of White Legal Strategy Group and co-host of the new PBS talk show “A Seat At The Table, advised, “Do your research before you sue to make sure you have a case you can prove–and prevail.” According to the lawyer, “If you can prove that the client has a legal obligation to pay, you can file a claim in court, small claims court if the amount is less than $15,000.00 (depending on the jurisdiction its limits can be as low as $10,000) and state court if the amount is in excess of $15,000.00.”
There are some preemptive measures you can take before pursuing legal action however, offered attorney I.K. James, who specializes in contract analysis and contract counseling. “Very generally, the most obvious legal option available to small businesses when clients don’t pay is pursuing legal action. There are, however, things that can be done prior to commencing litigation against a client including simply following up with the client to ascertain the status of payment; having an attorney write a letter demanding payment; or perhaps referring the matter to a collection agency (which may charge a fee or seek a portion of amount retrieved from client).”
Lindsey-Warren has put preventive measures in place to protect her business from failing clients. “This includes building up the business savings, requiring larger deposits at the beginning of our engagement, and having different payment timelines for clients and their revenue streams so I am never dependent on just one cash flow. I also started choosing a different caliber of clients who have budgets and can afford our services. In addition, after 60 days of work and not receiving a payment, I am not hesitant anymore to tell a client that we have stopped working until you make your payment,” she shared.
On top of changing her business strategy, Lindsey-Warren also changed her mindset about money. “A business mentor suggested that I read the book, ‘The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to do About It,’ by Michael E. Gerber, and it changed my entire perspective on how I viewed and operated my business,” she explained. “Essentially, being so stressed out about money is incorporating a ‘scarcity’ mentality. On the flip side, realizing that there is enough in the universe for me and everything will work out for my good, is an ‘abundance’ mentality. So, today, I don’t stress when clients don’t pay on time. Why? I have put measures in place.”
Here’s a quick guide to covering your basis to make sure clients pay up.
–Get it all in writing: “Memorialize in writing the terms of your agreement with the client (including the work to be done, cost, payment due dates). Consider also including how to handle disputes between the parties (i.e., litigation only, binding or nonbinding alternative dispute resolution, whether the winner of the dispute is entitled to fees, interest),” advised James. Added Hancock, “The contract should clearly delineate when payments are due. Having multiple payment points was helpful; however include a penalty provision in the contract for non-payment or late payments.”
–Talk your client through the contract: “It is also important to have a verbal conversation about payment expectations, to ensure that clients understand the agreement. Both verbal and written communications of payment expectations are advisable to ensure the client is clear about amounts due and the timing of payment,” explained White.
–Keep a log: “Document all work done as this was important support used in court to demonstrate I had performed the work as per the agreed upon scope,” noted Hancock.
–Ask for a deposit: “Obtain a deposit and/or retainer for work to be done. While the retainer should remain untouched, it does provide for protection in the event that the client does not pay,” said James.
–Learn more about your clients: “Do more homework on new clients prior to engaging with them. A Google search would have revealed this person was previously sued,” suggested Hancock. “Also, check within your network to see if this individual has worked with others you may know. There were three people in my network who had previously bad business dealings with the same individual that failed to pay me.”
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