Dealing with Late Paying Clients
This is my site Written by Alora on June 30, 2010 – 1:58 pm

What happens in your business when your clients are late paying their invoices? If you’re like most small businesses, this causes a domino effect: if my client doesn’t pay me, I can’t pay my team (vendors, contractors, etc.).

It is not uncommon to hear small business owners discuss this problem. And just as common is an assumption that this problem is biggest when it comes to dealing with other small businesses. Yet, according to a recent article on BusinessWeek, it’s actually large companies (with 1,000+ employees) who are most commonly deliquent paying their bills.

Quoting the results of Experian’s Business Benchmark Report for December 2009, BusinessWeek’s article discusses some of the reasons that it is not uncommon for larger organizations to be the worst offenders when it comes to paying the monthly bills. The short version is pretty simple: because they can.

While I have no doubt that is at least partially true, I think there are other factors at play as well. And from my time inside enterprise environments, there are several other steps I make a habit of doing specifically to help manage some of the risk involved.

Payment Structure
Instead of charging by the hour (which is usually not the best solution for entrepreneurs, anyway), charge by the job. Forget hourly accounting and daily charges if at all possible, and simply bid the job. Obviously that’s not always possible, but if it is, then the advantage to you is that you can change the payment schedule.

Charge one-third at the time of contract signing, one-third at the time of a specific (ideally based on a project milestone), and one-third at the time of completion. There is, of course, still risk in this, but setting up a payment schedule that includes a large first installment does help mitigate the danger.

Invoice Due Date
Tighten up your due date on your invoices. Even if you are on net 30 terms with your client, put the invoice due date 15 days out instead. Many places prioritize invoices by due date, and if you are on net 30 terms, many of them will not even think of moving you to the top of the To Pay stack until day 29.

Get Contact Info
One of the things that the BusinessWeek article didn’t mention is that a common problem with large companies is a lack of personal accountability thanks to complex processes, systems and diffused responsibility. The best way to get around this is to get a name: who should you speak to about your invoices? And then build a relationship with them. Start with an introduction — in person, if possible, but over the phone if nothing else. Do it long before the first invoice is due.

Introduce yourself and start off by asking them if there is anything they need from you. Double-check with them about their process, and make sure they know who to reach if they have any questions. While the phrase “it’s all about relationships” has been extensively over-used in recent years, the fact is that it’s true. So take advantage of it.

Late Fee Schedule
When all else fails, be sure that your contract includes a late fee schedule. A client not paying you on time damages your business, and can sometimes drain your bank account, so make sure that you are getting some compensation for that on the back-end, even in the worst case scenario.

Write it into the contract that the lawyers approve and everyone signs. If you decide to waive it as a show of good faith at some point, that’s up to you and part of your relationship-building. But at least if you’ve included it, you have a leg to stand on if the client leaves you holding the bag for too long.

The truth is, there is no easy way around it: clients who pay late cause a lot of pain in small businesses. And while BusinessWeek’s story only discussed a couple of reasons that it happens, the bottom line is that it does happen — and small business owners who count on contracts with large enterprises need to make sure they’ve covered their bases. And the time to do that is, as always, up front. Not after the fact.