two women looking at paperwork
There are many reasons why customers might miss a payment, and it is the responsibility of the business owner to professionally handle those situations. — Getty Images/Cecilie_Arcurs

As a small business owner, you’ll likely encounter clients who don’t pay on time or, even worse, don’t pay at all. This can be an aggravating and stressful situation, but there are tactful and effective ways to approach clients with delinquent accounts.

Here are some common reasons why customers miss a payment, different options to pursue, and helpful tips to prevent nonpayments from happening in the future.

Common reasons why customers don't pay

There are many reasons why a customer or client chooses not to pay their invoices. Here are common reasons clients give when they miss a payment:

  • It’s a low priority. Your customers might have more important bills or debts to cover. If it’s a matter of paying rent or keeping the lights on, they’ll ensure those payment deadlines are met before yours.
  • There are no repercussions. If you’ve been lenient with late payments in the past, some customers may take advantage of your kindness.
  • They’re going through tough times. Sometimes, a customer is simply enduring a difficult financial time and cannot meet your payment deadline as originally anticipated. In this case, it may be more difficult to collect your payment.
  • You issue paper invoices. Although electronic payments are more popular and quicker to process, many companies still use paper invoices. Paper invoice processing can take up to 50 hours per week in some instances, which might affect the time frame in which you receive payments.
  • You’ve extended credit to the client. Extending payment terms and offering credit can strengthen the relationship with clients, but as a result, you run a greater risk of nonpayment.
  • They’re unhappy with the product. If you don’t require payment upfront, a client may decide not to pay for a service or product that failed to meet their expectations.

[Read more: 8 Ways Your Business Can Find New Customers]

What to do if a customer doesn't pay

If you have sent payment reminders, follow-up emails, and phone calls, and the client still hasn't paid their invoice, consider these options before moving forward:

  • Ask why they aren’t paying. Ask questions about your client’s satisfaction, financial complexities, or other reasons they won’t pay. Open communication can get you to the root of the problem and help you develop a solution.
  • Send an updated invoice. Customers can blame a misplaced invoice for delayed payment. Resend the invoice promptly, even if you know they have the original, to eliminate this excuse.
  • Demand payment more firmly. Service businesses have the upper hand when it comes to offering an ultimatum. Set a deadline for when the service will end if they don’t pay what they owe.
  • Hire a factoring service. Invoice factoring services can help you out if you’re strapped for cash. The service advances you money for a certain percentage of your accounts receivable value, then closes the transaction when your client pays their invoice. However, factoring services typically run a credit check on your clients before agreeing to purchase the invoice.
  • Talk to a lawyer: Get an attorney involved.
  • Consider whether further action is worth it. If the missed payment is relatively small, you might not want to waste time or resources on further action. However, if the payment is a major chunk of your yearly income, it’s worth getting help from an attorney or collection agency.

Requiring payments upfront can prevent customers from quoting dissatisfaction as a reason not to pay.

When should I hire a collection agency?

When all else fails, a collection agency can collect your debt for you. Hiring a collection agency is often the last stop before litigation for businesses that need to settle an unpaid invoice. These agencies specialize in collecting payments typically 90 days past due.

While it can be an effective method of receiving payment, it’s not without its risks and costs. Some debt collectors may use tactics that you’re uncomfortable with, which is important if you want to maintain a good relationship with your clients after their debt is paid. Additionally, as with a factoring service, you will need to give the debt collection agency a percentage of the invoice upon collection, so you won’t end up with your full amount.

If you decide to go this route, do some research to find a reputable collection agency for your business.

If nothing you’re doing to receive your payment is working, including hiring a collection agency, your final option is to speak with an experienced attorney. They’ll recommend which legal courses of action you should take against your client, and ensure you’re adhering to any relevant laws or regulations (like the Fair Debt Collection Practices Act).

[Read more: 6 Customer Service Strategies That Will Boost Sales]

Tips to prevent nonpayments

Want to make sure your customers never miss a payment deadline? Here are some tips for preventing nonpayments:

Research your new prospects

Just like your customers likely evaluate your company before doing business with you, you should research your prospective clients before offering them your services.

Be clear with your payment policies

Requiring payments upfront can prevent customers from quoting dissatisfaction as a reason not to pay. Charging fees for late payments can discourage clients from delaying their payments.

Set up a contract that details your payment policies, including deposit schedules and late fees, in writing. A signed and dated legally binding contract from both parties involved can prevent legal hassles in the long run.

Send invoices immediately and schedule reminders

Give your clients ample time to pay you by sending invoices and billing for work as soon as possible. If it’s close to or past the deadline and someone still hasn’t paid you, don’t hesitate to reach out to them. The client may have forgotten about the invoice deadline and simply needed the reminder.

Accept payments online

The more flexible you are with payment methods, the easier it will be for your customers to pay you on time. By accepting digital payments, you’re accommodating those customers who prefer using popular apps like Venmo or PayPal.

Set up a payment plan

If your customer is having trouble with finances, creating a payment plan can ensure they pay on a set schedule that works for both parties. This will also strengthen your relationships with clients by instilling trust in them and offering options that support their financial well-being.

While you can’t control a customer’s decision not to pay you, you can follow these tips to help customers avoid late or missed payment deadlines. Whatever you decide to do, make sure all your communications with the client are polite, professional, and non-threatening.

[Read more: 5 Ways to Build Trust With Your Customers]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 11, 2023