It happens to every business at one time or another. You’ve completed the service and sent bill after bill after bill. And the customer just won’t pay.
At this point, it may be tempting to try all sorts of responses. Pumpers have threatened to return the sludge to the deadbeat customer’s tank. Such an outlandish action might sound satisfying, but it’s best not to follow through with the threat for a number of good reasons.
You have little choice but to take the high road — and that doesn’t mean giving up. You do have options when faced with a hard-case deadbeat. Here are some steps you can take.
1. Lay the groundwork in your business practices.
Make sure the work you deliver is backed by a written agreement setting forth your terms and that the customer signs before you start. Find out what regulations your state imposes on such contracts and follow them. Include in the document specific provisions about when payment is due: upon completion, net 10 days, or whatever you choose. There is no need to give more than 30 days, and there is nothing wrong with requiring immediate payment.
Many businesses add a 1.5 percent per month finance charge to past-due accounts. If that’s what you want to do, make sure it’s permitted where you operate, then make sure your standard agreement and all your invoices include that information.
Because a service contract is a legal document, you’re best off having a contract lawyer who knows your business draft your standard agreement. Your lawyer will help you decide whether it’s a good idea to specify who pays attorneys’ fees in a dispute and whether you want to go to arbitration rather than court.
“Get a form that works, and use it,” says Steve Schuman, a lawyer in Beverly Hills, Calif., who represents contractors and other clients in dealing with past-due bills. “Otherwise, you go to sue somebody, even in small claims court, you might lose because you haven’t followed the laws.”
2. Accept credit cards.
Plastic puts the customer’s money in your account much faster than virtually anything but cash. That alone is worth the service charges you will pay to the credit card company. And it’s easier that way to tell customers they must pay on completion.
3. Bill promptly.
If your policy allows customers to choose billing as a payment option, get the bills out as soon as you can. You don’t have to wait and bill everyone at the end of the month. All that does is hurt your cash flow.
4. Make sure delinquent bills stand out for the customer.
Print them on a different color of paper (such as red). Stamp them “past due” or program your invoicing software to print a past-due message.
5. Send a demand letter.
When customers are late, ask firmly for payment. Many contractors have systems that automatically generate demand letters on a trigger date, such as 60 days past due. Be careful about how you word the letter. The text should be straightforward and should stick to the facts. Note the date of service, the outcome, the terms you quoted, and the total amount due.
Set a deadline. Explain without bluster or threats what you will do if payment is not made. For example: “Failure to pay the amount due by the stated deadline may require legal action or lead us to send this bill to a collection agency.”
6. Hire a collection agency
But not to collect the bill, just to write letters. Some agencies will, for a flat fee, generate demand letters for you. Just getting a bill with the collection agency’s name on the letterhead will jolt some slow payers into action.
Another alternative: Pay your lawyer to draft such a letter and send it out each time you have a delinquent customer. “You probably want to go to a transactional lawyer and get him to draft a standard contract and a standard collection letter,” says Schuman. “You might in the first instance have to pay $500 for that letter. Then you can use it for years. You might be able to pay just $25 to $50 to have the lawyer send it each time.”
7. Go to small claims court.
The rules for small claims court differ from state to state, so make sure you know what applies where you live. The cap on how much you can sue for will vary, and states differ on whether you may use a lawyer.
But make sure going to court is worth the money. “This needs to be an economic proposition,” says Schuman. “It will cost you a certain number of dollars to pay the legal fees. Add up all the things you’re going to pay out of pocket, out of your time, to go after this. Then decide whether it’s going to be worth it. If someone rips you off for $100, don’t spend $500 getting revenge.”
Remember, also: Winning in court is not the same as collecting. “Then you only have a judgment,” says Schuman. “That doesn’t mean you can collect. You still have to go out and find their assets. You want to be careful you don’t spend more of your time and money than it’s worth trying to collect a judgment.”
8. Enforce a judgment with a mechanic’s lien.
With a written order from a judge, you can file a lien on property belonging to your debtor. Then you wait. You can only collect when it comes time for the debtor to sell or refinance the property. Liens are usually structured to generate a modest amount of interest, so as time passes your judgment should maintain its real dollar value.
9. Hire a collection agency to actually collect the bill.
This is usually an alternative to going to court. The drawback of using an agency is that you’ll only get a portion of the amount due — usually half of what the agency gets. But this measure allows you to get that old account out of the way and to move on.
Sometimes a contractor decides to sidestep the collection agency by offering a deep discount on the bad debt to encourage the customer to pay it off. You’ll have to decide whether that approach makes sense for you.
Throughout the collection process, keep your cool and stay professional. Let the delinquent customer know what legal recourses you have and will take, but don’t resort to threats or harassment.
