Get a signature
As Richard Branson said
at OPEN Forum, “In an ideal world, a handshake would be all that an entrepreneur or executive needs to seal a deal with a business partner. Unfortunately, we can’t rely on someone’s word to honor a deal. We need legal protection in the form of a signed contract.
This is Business 101, but you’d be dismayed to learn how many small business owners and entrepreneurs do work on handshake deals for the sake of “relationship building.” Make sure you have legal proof that your client agreed to the work you’ve described at the cost you’ve indicated. Oral agreements don’t cut it, and email is a gamble. Use invoice template software to prepare professional looking estimates and invoices, and review your terms with a lawyer to make sure they’re enforceable.Get a line of credit
Using credit to run your business can be frightening for new entrepreneurs. Remember that, in many industries, a large, short-term line of credit is essential to effectively manage your cash flow. As long as you have sufficient income to support your use of credit, you’ll be okay. And credit is perfect for situations that are largely outside your control, like late invoice payments. After all, you still need to pay your own suppliers and employees, and you can’t just push off payday because an invoice is late. Get a business line of credit
with your financial service provider before you need it, and be ready to draw on it if necessary.Build an emergency fund
When it comes to unplanned contingencies, of course, savings are far better than credit. But realistically, it can be challenging for shoestring entrepreneurs to have large sums of cash on hand. As your business grows, make sure you’re setting aside enough cash to cover your pending invoice payments.Adjust to your client
If a client pays late once, that might be a fluke. But if they pay late every time, you’ll need to adjust your expectations to match your client’s behavior. If these late payments are having a serious impact on your cash flow, you might insist changing terms to Cash on Delivery, or COD. You might also request a deposit, or as for a larger deposit if deposits are already part of your payment terms. Sometimes, you might even have to cut a client off all together.Have strong payment terms
Even though strong payment terms are essential for handling late payments, many entrepreneurs overlook them.. “So many small businesses don’t protect themselves with the appropriate legal language,” said Peter Marek of Invoice Home
, an invoice template site. “This can leave them little recourse in the case of late payments.” Don’t let yourself be one of the many. Make sure you have strong payment terms that provide some recourse in the case of late payments.
Make sure your invoices have clear language describing what happens if clients pay after the due date. A late payment penalty can encourage clients to make on-time payments to avoid the specter of additional fees. Of course, enforcing terms like this is another matter. The amount might be too small to merit legal action, and clients might just pay the balance and ignore additional fees. You’ll have to decide if enforcing late payment terms is worth it, depending on the size of the fee, the relationship with the client and the precedent you’re setting. But whether or not you enforce the terms, they should be clearly stated. That way, you have the freedom to use or ignore late payment penalties as you see fit.
If you’re not sure what late terms look like, a standard invoice might be due 30 calendar days after the invoice date, with late payment fee of $20 per month plus 3% of the invoiced amount. Of course, your terms will vary based on your invoice size, industry and clientele. Depending on where you live, your country might even have statutory late payment rates
.Be tactfully assertive
If you’re in a situation that requires you to talk to a client about late payments, be tactful
. The client probably isn’t slow-rolling you out of malice or spite. Remember that even if the late payment is having a major impact on your business, you probably won’t get what you want by approaching the conversation angry. Don’t assume the client will never pay, or that they’re trying to take advantage of you.
While you’re being tactful, make sure you’re appropriately assertive. You don’t want to let clients just do whatever they want to your business, and you need to have some boundaries.
If you’re not sure what to say, a good start is to determine if payment was sent. If it hasn’t been sent yet, get a date for payment and hold them accountable to this date. Requesting a tracking number of checks that are “in the mail.” If it’s appropriate, don’t be afraid to threaten more serious measure that late fees, such as legal action.What if they never pay?
If it becomes clear that a client simply isn’t intending to pay you, stop all work for them immediately. Let the client know that, because of their non-payment, you’ll need to explore legal action. This, accompanied by a strongly worded letter from your lawyer, might be enough to kick recalcitrant clients into gear.
If that doesn’t have the desired impact, you’ll need to decide if you want to write off the non-payment as a loss and move on, or if you plan to pursue legal action. This depends on how much work you’ve done and how much it has cost you. If you need to take a client to court for non-payment, consult a lawyer to determine the best move in your state or country.