As a small business owner, you’ve likely encountered clients who pay late or, worse, don’t pay at all. Fortunately, there are effective ways to deal with nonpaying customers and steps you can take to prevent this from happening in the future.
A step-by-step collections timeline
If a client is late on an invoice, don’t assume the worst right away since people fall behind on their payments for all kinds of reasons. The key is to start with a friendly reminder and slowly escalate things as necessary.
Send a casual reminder
You should follow up on the first day a payment is overdue, even with a new client. Send them a polite email that includes the invoice number and payment amount, and ask when you can expect to receive their payment. Keep your tone friendly and assume the missed payment was simply an oversight.
If a week or two goes by and you still haven’t received payment, follow up again and include another copy of your invoice. That way, the client can’t blame their lack of payment on misplacing the original invoice.
Call or request a meeting
Once an invoice is 30 to 60 days overdue, try calling or scheduling a meeting with them. If you can get them on the phone, try to figure out why they haven’t paid the invoice. Are they having cash flow problems? Is there a dispute about the work?
Getting to the root of the issue is your best shot at resolving it. If your client is having financial issues, consider offering them a payment plan since this is often the fastest way to get paid while preserving the relationship in the process.
Send a formal demand letter
Once you reach the 90-day mark, it’s time to send a formal debt collection letter by certified mail to establish a paper trail. This letter should clearly outline:
- The original due date.
- Summarize any steps you’ve taken to collect.
- Specify a firm deadline for payment.
- Outline the consequences if payment isn’t received.
The best time to establish boundaries over late or nonpayments is before the work begins.
When to use small claims court, liens, or a collection agency
If you’re unable to work it out with your client, there are legal options you can pursue. For instance, you can hire a collection agency to recover the debt once the invoice is more than 90 days past due. This strategy saves you time, but it comes at a cost.
Most agencies take between 20% to 50% of whatever they collect. You won’t owe anything if they can’t collect the debt, but you also walk away with nothing. Plus, many collections agencies use aggressive tactics that could damage your reputation.
For unpaid invoices within your state’s dollar limit, small claims court is another option to look into. To file, you’ll need your original contract or agreement, copies of invoices and any communication about the debt, and proof of the work performed. If you win, the court will issue a judgment in your favor, but you’re responsible for collecting on the judgment.
Finally, contractors and service providers who did work on a client’s property may have the right to file a mechanic’s lien. A lien attaches to the property and must be paid off before the property can be sold or refinanced, which gives you significant leverage. Lien laws vary significantly by state, so consult with a local attorney before proceeding.
Late-fee and interest language to add to your contracts and invoices
The best time to establish boundaries over late or nonpayments is before the work begins. Adding clear payment terms to your contracts gives you a stronger legal footing and sets the expectations from the start. Here’s sample language you can add to your contracts:
- Late fee clause: “Payment is due within 30 days of the invoice date. Invoices unpaid after the due date are subject to a late fee of 1.5% per month on the outstanding balance.”
- Early payment incentive clause: “A 2% discount will be applied to invoices paid within 10 days of the invoice date.”
- Collections and legal fees clause: “If collection efforts are required, Client agrees to reimburse [Your Business Name] for all reasonable collection costs, including attorney’s fees.”
Make sure your late fee rate is legal in your state, since some states cap interest on commercial debts. It’s also a good idea to consult with an attorney who can draft the contract on your behalf.
Lauren Kubiak and Sean Peek also contributed to this article.
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