Late or non-paying clients are a hard fact of business. Small businesses in particular are vulnerable because they lack the accounting and legal resources to deal with these customers, with collections falling squarely on the shoulders of the business owner. Likewise, smaller firms and sole proprietors eager to acquire new clients often rely on loosely structured quotes, estimates, statements of work and other non-binding agreements to secure new business.

Here are some approaches that your small business can take to mitigate the risk of dealing with late or non-payment, as well as some options for collecting that debt.

Develop a Payment Policy and Discuss It with Your Client

Part-payment policies by which a client pays a portion of your fee up front are common in service-based businesses – particularly where you need to make an upfront investment in inventory or equipment to get the job done. Try to secure 50 percent of your fee up front if you can. You should also agree on invoicing terms in advance.

If your client is a consumer, be aggressive with your final payment terms – 7-10 days upon receipt of invoice is normal. For business clients (B2B), the industry standard these days is 30 days. Many companies can deliver within 15 days - particularly  smaller, more agile business clients - so don’t be afraid to ask and negotiate.

Consider a Late Payment Fee

A late-payment fee is basically an incentive to pay on time. You will need to build language around this into a contract or payment policy before doing any work. Late fees are typically a percentage of the total bill (usually 6-10 percent per year, although you should check this with a lawyer). Any interest charged on late payments might also be subject to state laws, which limit the amount of interest that can be charged.

Put a Collections Plan in Place

There are many reasons why a client won’t pay, but if you have delivered services or products in good faith and the client has not complained about your business, these soft measures can help you deal with any non-payment:

  • Re-issue past due bills - As soon as your first bill is past due, reach out to the client and ask them if the bill was received and is in process. You may need to re-bill as a gentle reminder. You can also send a monthly statement with the outstanding amount owed (with interest, if your policies or contract stipulate a late fee) clearly labeled as past due.
  • Get to know your client’s accounts department – If payment is still not forthcoming, seek out the accounts payable department (call the client front desk or operator). Check whether the invoice was received and if you can help in any way. All the while, maintain a steady and friendly relationship. Don't hang up until you get a verbal agreement confirming when the payment will be made. Follow-up over e-mail confirming the conversation and maintain a paper trail.  If this fails, bring it to the attention of a VP or President of the company.
  • Don’t apologize - Stick to your guns and never apologize for chasing payment.
  • Offer a payment plan – You may want to offer a payment plan, especially if you have a good relationship with the client and they are having cash flow problems.

If All Else Fails – Threaten Legal Action and Be Ready to Report the Client

If your “soft” approach has failed and the invoice runs past due more than 60 days, you may need to threaten legal action and/or report the client to the Better Business Bureau. Alternate options include working with an attorney to issue a demand payment letter or filing with a small claims court if the arrears is under $3,000. The latter is a cheaper option since a lawyer need not be involved.

If Your Client Files for Bankruptcy

If you suspect bankruptcy is in the cards – look out for a lack of communication from senior employees, adverse industry conditions, etc. – consult an attorney and always file a proof of claim. Once a bankruptcy petition has been filed, the debtor has the benefit of an automatic stay. This prevents you from taking any further action to collect the debt unless, or until, the bankruptcy court decides to the contrary.