If your customers aren’t paying you on time they’re costing you money. Worse, they may never pay you at all.
Yet protecting yourself against slow or non-paying customers is not difficult – it just requires that you put a simple, logical process in place.
Here’s the process I use:
Lay down the ground rules at the quotation stage
Depending on how well I know the person (or company) I’m preparing a quotation for, I’ll do anything from a simple, 1-page quote to a full blown business proposal.
No matter what route you go, always specify the payment terms you expect in your quotation or proposal.
Requiring anything up to 50% of your fee before you start work is perfectly standard if you’re offering consulting services or, like me, you’re creating websites.
In my case, I usually ask for 50% up front and then create the design on one of my development sites. When the client is happy with the design and ready for the site to go live I require the balance before installing and activating it on their domain.
If it’s a particularly long project you may want to consider taking your fee in 3 tranches instead of 2.
Whatever option you take, taking a portion of your fee up front is the first step to minimising your potential losses and it eases the sticker shock for your customer.
Assuming I’m taking payment in two tranches, my next step is to require payment of the balance before making the site live or, if you’re delivering consulting services, before releasing the final report.
Doing this will virtually insulate you from losses unless the client doesn’t give the go-ahead to install the site (or receive the report) – in which case you have a problem!
This hasn’t happened to me yet, but if or when it does I’ll probably end up putting it down to experience.
It’s difficult to go legal or send the debt collectors round if the client can claim they haven’t received the goods.
I have a paragraph in my full-blown business proposal that states I’ll charge interest on overdue amounts at the rate of 2% above my local bank’s minimum lending rate.
I’ve never actually done that, and the problem with trying to do it is that if they’re not paying your invoice it’s unlikely they’ll pay the late payment penalty, unless you win a court judgement.
None-the-less, I keep it there as part of laying down the ground rules up front and it does ensure my documentation is complete in the event I do end up going to court.
Reinforce the ground rules at the invoicing stage
When you issue your invoices it goes without saying that your payment terms must be clearly set out, and that they match the terms you specified in your quotation or proposal.
I sometimes include a copy of the proposal or quotation with my invoice if it’s a first-time customer or if the project took a while, but I don’t bother with repeat customers or short projects.
If you’re requiring the balance prior to installing the site (or delivering the final report) you should state clearly on your invoice that the site will only be installed (or report delivered) once payment has been received.
Enforce the ground rules with non- or late-payers
In my case, non- or late-payments usually occur with my on-going monthly support service customers, who I invoice once a month.
Because they’re mostly companies, I’ve been giving them 30 day payment terms. However, most of them ended up paying at around 45 days and then only after being chased, so I’ve just reduced those payment terms to 15 days.
It may not make them pay any quicker but I can, at least, start sending reminders earlier!
Here it’s important to send a reminder soon after the invoice becomes overdue.
I issue those monthly invoices at the beginning of each month and I’ve set up a repeating item in my Yahoo calendar for a week after the due date of those invoices, which reminds me to send out the follow-ups.
If the invoice is unpaid after 2 of those reminders I get on the phone and politely ask for payment, and if payment is still not forthcoming I simply issue a written warning and lock down the site.
I do that by changing all the access passwords and uploading a blank
index.html file to the server.
Ultimately, if that doesn’t trigger payment, I turn the debt over to a debt collector.
This is a step I try to avoid, because it certainly brings the relationship with that customer to a rapid end!
But if the customer isn't paying, and appears to have no intention of paying, then not only do I have no options, but they're not worth the hassle and stress - they're costing too much!
Depending on where your customer is, the debt collection agencies (at least here in Hong Kong) take anywhere up to 25% of the collected amount as commission. It is frustrating to lose that amount but it’s better than not collecting anything at all!
I’ve been very lucky so far, in that I’ve had very few bad debts. I’ve no doubt I’ll get some in the future, but I’m hopeful that the process I use will minimise the chances.
So don’t let your customers cost you money: make sure you have a clear process for getting prompt payment and minimising your potential losses.