How to Collect Money from Clients Who Won’t Pay | Tips for Avoiding Non-Payment
To collect money from clients who won’t pay their overdue invoices, small businesses should begin by following up with the client by email and phone or speaking directly to the company’s billing department. If your efforts still don’t get you paid for your services, consider hiring a collection agency or seeking the advice of a lawyer to explore your legal options, including arbitration or filing a lawsuit.
These topics will teach you how to collect money from clients who won’t pay:
How to Collect from Late-Paying Clients
Small businesses and freelancers are likely to deal with late-paying clients at some point during their careers. According to the Freelancers Union, 71 percent of freelancers struggle to collect late payment from a client at some point in their careers. These 10 steps can help you collect money from late-paying clients:
Send Polite Reminders
If a client’s payment is overdue, the first step you should take is to send a polite reminder email immediately after the due date. You can use a payment reminder email template to help you draft an email that’s polite and professional, to increase your chances of getting paid. Let the client know the invoice is now past due and include the payment due date. Remind them of the payment methods you accept and also outline any late fees that are included in your payment terms. Attach the original invoice to the email, for reference.
Pick up the Phone
If you don’t have success collecting late payment by sending email reminders to the client, your next step should be to pick up the phone and try to speak directly to the client. As with your email reminders, be polite and friendly when you call. Ask what the issue is that’s preventing you from receiving payment and try to work out a solution. If possible, secure payment over the phone by getting a credit card number. If not, get your client to agree to a specific date by which they will send your money.
Go Directly to the Payment Source
If your call to the client does not yield payment by the agreed upon deadline, try a different tactic by going directly to the client’s billing or finance team, instead of your day-to-day business contact. Find the contact information for the billing department and call them. The billing department will have more information about the status of your invoice and whether there are any issues with it that are preventing them from paying. The billing department is also best equipped to give a realistic timeline for payment and push to get it sent to you quickly.
Cut off Future Work
If you’ve taken the previous steps with no success, it might be time to cut off the client from other work until you receive the money. Not only is it an incentive for them to pay so they can move forward on other projects, it also protects you from losing even more of your time and money to an unreliable customer.
Hire a Collection Agency
To escalate the situation and get outside help collecting your money, you can consider hiring a collection agency. Collection agencies are often very successful at collecting payment from debtors, but they charge a hefty fee for the service, often as much as 50 percent of the total payment. However, it can be a good option to get back some of the money you’re owed. If you do hire a collection agency, make sure it’s a reputable firm that’s a member in good standing with the Commercial Collection Agency Association.
Take the Client to Small Claims Court
If the outstanding debt isn’t too large but you don’t think you’ll be able to collect it on your own, you can consider suing the client and taking them to small claims court. Every state has small claims courts that resolve disputes involving relatively small amounts of money, usually to a maximum between $2,000 and $10,000, depending on the state. Small claims court is relatively inexpensive and quick. You don’t need a lawyer to represent you and if the client doesn’t show up, which is common, you’ll win by default.
Sue the Client in Superior Court
If the money you’re owed is more than the limits set for your state’s small claims court, you can sue your client in superior court. Superior court cases usually take more time to go to trial than small claims cases and you may wish to have a lawyer representing you.
Go to Arbitration
Instead of going to court, you can opt to take the client to arbitration instead. Much like small claims court, arbitration can be a relatively quick and cheap way to collect payment from a client. The main difference is that arbitration is less formal than a court case and is overseen by an arbitrator rather than a judge. The arbitrator’s judgement can be enforced in the same way that a judge’s can.
In Future, Charge Late Fees
To encourage clients to pay on time in the future, consider adding a clause to your payment terms that includes late fees that you’ll charge for overdue payments. Be sure to talk to your clients about your late fees before adding those terms to your invoices, to make sure they understand the policy and aren’t surprised when they see it in writing.
Consider Asking for Deposits or Prepayment
To better protect yourself from late payments in the future, consider requesting a deposit at the time you sign a contract for new work. It’s common practice to request a deposit from clients of 25 to 50 percent of the total value of the contract. You can also ask for payment for your work upfront, before you start a project.
How Do I Take Legal Action for Nonpayment?
There are some important steps small businesses need to take in order to take legal action for nonpayment. Here’s how to deal with nonpayment through the legal system:
- Send a demand for payment letter: Before suing your client, send a formal demand letter that states why the client is in default, lists how much you’re owed, demands payment by a specific date and warns of possible legal action.
- File a lawsuit and request prejudgment relief: File a complaint in court and then take legal action to get prejudgment relief, such as by applying for a writ of attachment.
- Sue in small claims court: For relatively small amounts of money owed, you can get judgement on your case quickly and cheaply by filing a lawsuit in small claims court.
- Sue in superior court: For larger sums of money that exceed the small claims limit in your state, you can sue the client in superior court.