Published September 2007

Chasing Deadbeats

By Fred S. Steingold (page 74)

Persistence, patience and creative payment solutions can nudge slow-paying customers to action.

Do you require all customers to pay upfront with cash, checks, or credit cards? If not, you’ll run into collection problems — at least occasionally. But you can easily cut your losses to the bare minimum if you follow some time-tested practices.

Two California lawyers — Stephen Fishman and Richard Stim — have words of wisdom to help keep you on the right track. Here’s the essence of their advice.

There are three types of slow payers

First, understand that not all late-paying customers are deadbeats. Late-payers come in three basic varieties, those who:

• Want to pay, but financial problems keep them from doing it on time.

• Intentionally put off paying, but plan to pay eventually.

• Will do everything they can to avoid paying.

Only the third category represents true deadbeats. With these folks, your best bet is to stop wasting time and energy trying to collect what’s owed. Once you recognize what they’re up to, turn their accounts over to a collection agency. But be prepared to accept much less than what’s owed — or even nothing at all.

Fortunately, with customers in the first two categories, your chances of getting full payment are much better. Careful management of their accounts is worth the effort.

Improve your collection efforts

To get the most out of your collection practices, Stim offers this basic advice: “Get busy as soon as possible and stay on the account until you’re paid. Send bills promptly and re-bill monthly. There’s no need to wait for the end of the month. Send past-due notices once the account is overdue.”

Stim — co-author of Whoops! I’m in Business: A Crash Course in Business Basics — offers these excellent tips for dealing with slow-paying customers:

Seek creative solutions. The customer may have real financial problems. Work with the customer to develop a realistic plan for paying the debt. One possibility is to extend the time for payment — if the customer will commit in writing to a revised payment schedule. Be sure to call before each payment is due to remind the customer of the written commitment.

Try a one-time discount. “We’ll knock 10 percent off the bill if you pay up in the next 10 days” may get the debtor’s attention — and save you from spending more time and effort trying to collect the debt. Sure, it’s a compromise, but often is well worth it.

Keep good records. Save copies of your letters seeking payment and notes of your phone contacts. These can help if you wind up turning the debt over to a collection agency, or if you have to sue the customer.

Consider hiring a collection agency to send demand letters. This is separate from turning over the debt for collection. For a modest fee, a collection agency will usually agree to send a series of three letters to a debtor. These may have greater impact than your own letters. Some collection agencies may also be willing to make phone calls on your behalf.

Don’t harass. Your goal is let the debtor know that you pay close attention to slow-paying customers. But you can get into legal trouble if you push too hard. Don’t call the debtor more than once a day, and don’t threaten the debtor or leave messages with others (such as an employer) that put the debtor in a bad light.

Don’t get personal. Avoid being judgmental when you speak to or write to debtors. Focus instead on the debt — and the urgency of getting it paid off as soon as possible.

Persistence can pay off

Fishman is the author of Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants. He recommends you start with a series of collection letters. If that doesn’t work, contact the customer by phone. When the debtor is another business, try talking to the owner or corporate president. With larger bills, there’s nothing wrong with making an appointment for an in-person discussion.

It’s trite but true: The squeaky wheel gets attention. Be persistent. But recognize that with some debtors, hardly anything will work. That’s when you should consider going to court — if you believe the debtor has the means to pay. A judgment against an insolvent debtor is worthless.

Going to court doesn’t always require hiring a lawyer. Often you can handle the case yourself in small claims court. The procedures are simplified and the filing fees are modest. Court employees can guide you through the process.

Consider involving the court

Sometimes a debtor will have a good-faith reason to dispute the size of your bill. Listen carefully. If the issue isn’t black-and-white, it can make good business sense to negotiate a settlement. By doing so, you may be able preserve a relationship with the customer.

Still another option for disputed debts is arbitration. The debtor may agree to let an impartial third party resolve a disputed debt. Some businesses have all customers sign an arbitration agreement before extending credit to them. Arbitration is typically quicker and cheaper than going to court to resolve disputes.