No matter how many articles you’ve read on collections and bad debt, it’s still surprising when an established client ignores your invoice and suddenly stops taking your calls. One Web designer I spoke with named Karen surely didn’t expect that nearly 30% of her accounts receivable in 2003 would remain uncollected five months into the new year. While each non-paying client has his or her own excuse for being tardy — from “lost” letters to empty coffers — the cumulative effect on Karen’s business has been both financially draining and personally demoralizing.

Has this happened to you? If so, you’re in good company. According to the National Federation of Independent Business (NFIB), roughly one in four small businesses report their average invoiced payments extend beyond 30 days. For many, these slow-to-arrive (if at all) invoice receipts eat into what is already a slim profit margin. Do you believe, as many do, that there is little you can do as a small business owner to expedite the payment of these overdue invoices? Are you unwilling to assume the personality and employ the energy required to act as your own debt collector? Keep one fact in mind as you weigh your options, you have the legal and moral right to be paid for your contracted work. Read on, and we’ll show you how it’s less scary, and much easier, than you might think.

Step #1: Discouraging Late Payments and Bad Debt

There is much you can do up front to avoid overdue invoices and slow-paying clients. The road to timely payments starts when you solidify your client engagements with signed contracts, clear credit policies and payment terms, and an in-house process for ensuring effective invoicing and follow-up.

• Establish a detailed credit policy that outlines how clients establish credit with your business, your payment terms, any penalties charged for late payment, and how you collect on overdue accounts. Include this information clearly on all contracts and summarize on invoices. For a sample “terms and conditions” form that you can tailor to your own business, see Creative Refuge's Downloads page. If you already work with or plan to work with a collection agency, they should be able to help you set up your policies as well.
  
• Run credit checks on new customers (if your profits from the job justify the cost of running such a report) and set credit limits with which you feel comfortable. You may also want to require partial payment up front or progressive payments throughout the project — particularly with first-time customers.
  
• Ensure that clients sign a contract or purchase order — agreeing to your deliverables, terms, prices, and policies — prior to starting a project or delivering goods. Creating and reviewing this document with your client will help set expectations for both parties and will provide you with a more effective case if legal actions are pursued down the road.
  
• Establish, assign, and enforce responsibilities, embedded within your business processes, to make sure invoices and reminder notices are sent in a timely manner.

Step #2: Systematic Invoicing

Be clear, consistent, and timely with invoices and follow-up on late payments. The more professional your business appearance, the better chance you’ll be taken seriously and paid in a timely manner for your work.

Implementing reliable processes for tracking and billing clients is crucial to the fiscal health of your business. Most business or accounting software programs (like Quickbooks Pro or Peachtree Complete Accounting) include features that help organize your billing schedule, categorize the age of your accounts receivable, and alert you to overdue accounts. If you still don’t have the time or resources to do this yourself, you can outsource the work to a local bookkeeping or online service firm (for example, a Quickbooks online service will send out invoices for you, charging a monthly fee of $14.95 plus $.99 per invoice).

No matter how you plan to invoice and track, make every effort to:

• Send an invoice as soon as possible after a project or delivery of goods is completed. Payment terms are often set up as “due upon receipt” of invoice, while others give clients 30 days to pay.
  
• If the invoice due date arrives and you’ve heard nothing from the client, plan to begin follow-up procedures within 10 days. This can and should involve sending repeat invoices (with “past-due” or similar verbiage to remind client of the terms and his payment status) and phone calls. Be direct in your phone call’s intent, but careful not to accuse or threaten. There are many possible (and very valid) reasons why you may not yet be paid at this point. The client may not have received the invoice, may have an accounts payable schedule that conflicts with your due date, may not be satisfied with the product or service delivered, or, quite frequently, the check truly is “in the mail.” In any event, work with the client at this juncture to agree upon the next step — whether that means payment in full, a payment plan, or further discussion of the disputed or unwanted goods or services.
  
• Send follow-up invoices on a regular schedule (ie. at 30, 60, and 90 days past the initial invoice due date). Attempt to reach the client by phone during this time as well. The NFIB advises, “Don't apologize for calling or joke around. It comes across as weakness, giving some the impression you can be stalled further. Be friendly but businesslike.” In any case, with each call confirm with the client when payment in part or in full will be made. Finally, if you decide to take legal action, you can inform the client of your intentions, giving them a final opportunity to pay before you secure the services of an attorney or collection agency.

Step #3: Collecting on Past-Due Debt

Freelancers and small business owners have two options when faced with past-due debt. You can handle it yourself (likely with the help of an attorney) or outsource most or all collection activities to an agency. In either case, accounts 120 days delinquent (90 days past the invoice due date) should be flagged and considered for collections.

• Do-It-Yourself Collections: While you can send out a collections notice and take it to court yourself, you’re better off using an attorney for legal guidance and third-party “muscle.” Oftentimes, a collections letter from an attorney or collection agency will provide enough motivation to trigger payment. So, consider the amount owed to you. Then compare the collection agency fees (often a percentage of what is collected) against what your attorney will charge to send an initial letter or make a quick phone call. The attorney’s fee for this highly effective contact may motivate payment and eliminate the need for the often more expensive collection agency involvement.
  
• Collection Agencies: Utilizing the resources of a collection agency can be costly, but will likely save you time and energy using skilled professionals. Agencies will take over part or all of your past-due receivables and work to collect as much of that value as possible. They are typically paid on a percentage of what they collect (often 25-50%). This percentage may seem steep, but must be weighed against your own ability (in terms of time and temperament) to collect any of the past-due revenue, and the likelihood that you’ll succeed.
  
  It is important throughout this process that you understand the laws regulating collections. Even if you outsource the job to a collection agency, you may be liable for illegal activities undertaken by the agency during the collections process. To best protect yourself, remember to maintain good judgment and basic respect for your late-paying client. Do not threaten to sue or turn an account over to collections unless this is your true intention. Do not send notices that reveal to third parties an account’s delinquent status (ie. sending postcards or envelopes stamped “past due”). Your attorney can advise you of applicable laws and standards. Finally, if you do go the collections route, do yourself a huge favor – seek referrals and only hire a reputable, certified agency.
  
  For referrals to a collection agency, check with colleagues and business advisors (ie. your accountant or attorney). Though you may want to work with a local agency, make sure they are able to collect on a national basis or partner with affiliated agencies as you may very well have current or future delinquent clients outside your local area. As this firm will be representing you and your business, you’ll want to feel secure knowing they will act in a professional manner, respecting rights, and obeying the law. Check out the agency with the Better Business Bureau (or equivalent) to ensure credibility. You can also check for membership with professional collection organizations such as the Commercial Collection Agency Association or ACA International.

Karen may still get into situations where clients refuse or are unable to pay, but since recognizing the drain that late payments were having on her bottom line, she has rewritten her credit terms and conditions to include a detailed collections policy. Karen plans to fully utilize the business software package she now owns to more accurately track late payments. Most importantly, she feels more confident in her ability to seek payment from late-payers, and her legal right to do so.

It is highly probable that the majority of clients will pay what is rightfully owed to you. Their motivation may be to prolong a solid working relationship with your business, to maintain their personal and professional reputation, to preserve their credit standing, or, ideally, because it is the right thing to do. While there is little need to stay up late devising a bulletproof collections policy, it would be prudent to prepare for late- and non-payers before the situation arises. Follow the steps outlined in this article and, when the time comes to make some calls or enlist an agency for help, you’ll know you are doing everything you can.

© 2004 Jill Toole, M.B.A.