When Your Customers Are Deadbeats

Financial Problems.

Cash flow is everything for a small business. One surefire way to see that cash flow dwindle is letting unpaid bills mount.

Delinquent customers may not seem like a big deal, but the impact can be crippling to a small business both from an operations perspective and from the ability for the business to get credit.

“Cash flow is the lifeblood of small businesses,” says Brian Liu, co-founder and chairman of LegalZoom. “Unpaid bills can quickly become a nightmare.”

So what can a small business do to prevent customers from not paying their bills? According to legal experts, the first thing to do is to be discerning when taking on new clients.

According to Nellie Akalp, a serial entrepreneur and chief executive of CorpNet Incorporation Services, running a credit report on the business or consumer is one way to protect the business.  While it doesn’t guarantee the customer will pay, knowing their history will help you decide if you should take them on to begin with.

“You should never begin a project with a client without performing a background check on their credit history,” adds Charley Moore, founder and chairman of Rocket Lawyer. “If their credit isn’t up to standards you can ask the client to pay upfront or forgo the project all together.”

Before you do any work, Moore says small businesses should draft a contract that outlines the billing procedure whether it’ paying a percentage up front or paying the entire amount 30 days after the work is complete. By putting it in writing it gives you a record if a dispute arises, he says.

Since delinquent customers are pretty much the norm with small businesses, another way to get customers to pay up is to offer incentives, says Liu at LegalZoom. He says business owners can provide a 2% discount if the bill is paid within ten business days or a bigger discount if the bill is paid up front. That discount may be all it takes to get the customer to pay.

“If a client becomes delinquent and has a hard time paying the sales people get on the phone and we offer a discount for early payment,” says Aklap. “It’s all about getting that client attracted to making that payment.” CorpNet typically offers a 10% discount if clients pay the full balance when it comes due.

It’s no secret small business owners are pressed for time, but an important step in preventing delinquent customers is consistency with billing. The small business owner has to make sure he or she is billing customers on the same day every month and sending reminders 60 days and 90 days out.  This makes it harder for the customer to forget to pay the bill. “If you follow up consistently about the unpaid balance, you’re much more likely to have customers take your bills seriously,” says Moore.

When all else fails, it may be time to take action or at least threaten action. Warning the customer that you plan to put them in a collection agency or plan on giving them a negative review online may be all it takes to get them to pay.  Even having your attorney draft a demand letter and sending it on your behalf via certified mail may do the trick, says Liu of LegalZoom.

If the bill still goes unpaid, then one option is to take the customer to small claims court. Keep in mind that depending on the state there are limits to how much you can collect in small claims court. And going to small claims court will cost you time, which to most small business owners always means money.

At the end of the day you have to weigh the time and expense of collecting on the debt with what is owed. While uncollected bills could hurt your business down the road, sometimes it may be better to throw in the towel, especially if it’s a low amount.

“Sometimes when the chances of repayment are low, it might cost you more to go after the debt than you’d actually collect,” says Moore. “It really depends on the amount of the debt, the amount of money it will cost you to go after it, and your chances of collecting.”

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