Money and payment can be a touchy subject for many women. This is no less true for women who own businesses. There’s a whole host of studies and articles and books on the topic. But the reality is you can’t run a business if you aren’t getting paid, so at some point we all figure out that we need to charge for our time and services and what the value of our work is.
But what happens when a client stops paying you? Maybe you have a monthly fee and they start falling behind. Or they paid their deposit but refuse to pay the balance. “The check’s in the mail,” or “I’ll send payment Friday” become a constant refrain but payment never comes.
What can you do?
What if there is a genuine dispute about payment and services? If so, look to your agreement for any dispute resolution terms – perhaps there’s language about mediation or arbitration. If so, initiate that. If it isn’t included, you can always suggest that option to your non-paying client.
If there is no dispute, or you’ve exhausted all efforts to address and rectify the issue with your client, and they simply aren’t paying, then look to your agreement for payment terms addressing missed and/or late payments. If you have that language, enforce it.
How do you enforce payment terms? Depending on what your agreement says (or doesn’t say), you have a few options – each needs to be considered carefully.
1. For amounts less than $7000 (in Massachusetts – other states may have different limits) you can file a claim in small claims court. Small claims court is designed so that you can represent yourself (though certainly you can hire an attorney if you prefer).
2. For amounts in excess of $7000 (in Massachusetts – other states may have different limits) you can either file a claim in small claims for the maximum (knowing that you will have to eat the difference which you will no longer be able to recover if you prevail), or file a lawsuit for the full amount in district or superior court. For that you will likely need an attorney. This is obviously more expensive – so when discussing this option with counsel a return-on-investment analysis is warranted. Are you going to spend more in legal fees than you might possibly recover? Is there language in your agreement that would allow you to recover legal fees in the event of a lawsuit or enforcement of payment? While there is a high probability of settling before actually getting to court – settlements can still incur pretty hefty legal fees and few attorneys will take these types of cases on a contingency fee basis.
3. Utilize a collections service. This will take you out of the process of trying to recover the money, but comes at a cost – collections companies charge a significant percentage of the money they recover. Typically, if they fail to recover anything, you do not pay for the service.
4. Let it go and chalk it up to an expensive lesson and figure out how to structure your future client relationships and payment collection process in such a way as to avoid this.
What if you don’t have an agreement? It’s going to be harder to collect, but might not be impossible. The decision to file in small claims or not will still be based on the amount you are trying to recover. But without a signed agreement, you will need to provide evidence of an implied agreement, whether that is showing a series of paid invoices, emails or texts between you and your client about the services and payment, or any other evidence of an agreement or understanding that services were requested and performed.
You don’t have an agreement, or you do, but it didn’t hold up.
It may be an expensive lesson, but a non-paying client is an opportunity to make changes that will benefit your business in the long run. If you have a non-paying client, or worse several, it is time to shore up your contract and practices. Here are some ways to minimize the risk of non-payment in the future.
1. Collect your ALL fees up front. “I will gladly pay you Tuesday, for a hamburger today.” (10 points to those of you who get this reference!). While it can feel like you’re helping your client out when you allow this kind of arrangement – it’s risky business. While they may truly have full intention to pay you, things happen. Remember it is always easier to refund money than to collect it.
2. Deposits/Retainers. If you can’t or won’t collect full fees in advance collect a deposit and/or retainer. If you have to order supplies to be able to perform work, require a deposit that covers that cost. Allow a refund on deposits covering such supplies if and only if you are able to return the supplies for a full refund – even then consider retaining a portion of the deposit to cover your time spent ordering and returning the supplies.
Retainers reserve your time, a spot/seat, or a date. A retainer is an easy way to mitigate loss of potential revenue if you have a limited capacity for clients and would not be able to replace a lost client if they cancel.
Consider withholding final work/services until the balance is paid – and make sure the balance is proportional to the value of that final delivery.
3. Payment Plans. If you offer a payment plan it should reflect the value of work completed/performed across the payment period. Ideally, the work you have performed at any given point should never be of greater value than the money you’ve collected. Equally important is that your work should cease if payments stop. If starting and stopping work is problematic, consider a reinstatement fee to begin work again.
Ideally, monthly fees (or any consistent periodic charges) should be processed automatically to the client’s debit or credit card – be sure to get an authorization to charge the card and include a clear “no chargeback” policy in your agreement.
4. Deter non-payment. The possibility of incurring late fees, interest, or liquidated damages can be enough incentive to ensure prompt and full payment. These types of clauses should be significant enough to “sting” but also should cover your actual losses in the event of non-payment – whether that is increased administrative costs while trying to bill/collect fees, or the loss of potential revenue because you can only take on a limited number of clients at a time.
5. Postponement and Cancellation Terms. Have clear terms about postponement and/or cancellation of services, including any fees or liquidated damages. Again – if there are costs to client associated with postponement or canceling, it may disincentive them to do so. And if they do, clear terms will be easier to enforce in court.
6. Refund Policy. If you are collecting some or all fees in advance, you need a clear refund policy. That policy can range from “No refunds” to a “100% money back guarantee” or anything in between. It just needs to be clear, consistently enforced and, most importantly, make sense with how you run your business.