When the check's not in the mail

Effectively dealing with slow-pay-no-pay customers – and still maintaining a positive relationship with them

Story by John R. Ingrisano

Like Charlie Brown in a Peanuts cartoon standing by the mailbox in hope of receiving a Valentine’s Day card, too many of us small business owners find ourselves anxiously waiting for the arrival of that overdue payment.

If the problem gets too serious, it can have a domino-affect on our entire lives – as we stretch our mortgage payment…max out our credit card limits…make minimum payments on bills…ignore an invoice or two, especially if from another, no-clout small business owner. Often we might wake up at 3 a.m. wondering how much cash value we can strip out of our life insurance policy or the kids’ college fund…or just lying in the dark listening to the financial and emotional infrastructure of our lives as it begins to creak, teeter, snap and slowly topple.

Though all companies are vulnerable to the problem of customers who play the game of slow-pay-no-pay, it is usually the small business owner who feels it first and feels it hardest. 

Fortunately, it does not have to be that way. While there is no guarantee that all invoices will be paid promptly, there is a lot business owners can do to take charge of the slow-pay-no-pay problem.

Small business takes it on the chin
If your customers are slow to pay, you’re not alone. According to a report released in July 2007 by the credit bureau Experian, the average time for an invoice to be paid is 61.07 days. Large businesses are still by far the slowest, at 81.5 days. Medium and small companies, reports Experian, take 61.3 and 60.2 days, respectively.

This can bring cash flow to a trickle.

“Many times when my clients are not paid promptly, they still have to pay their payroll and payroll taxes,” explained Terri S. Hansen, president of ts Hansen & Associates, LLC in Oshkosh.

Meanwhile, banks are keeping a careful watch on their clients, points out John Schuster, a partner in the Oshkosh-based business law and real estate law firm of Young, Schuster and Maslowski, LLP.

“Lenders monitor their customers’ activities. If a business’s overdue accounts become too big, that makes lenders nervous. Most business loans are demand loans. They can call them at any time,” Schuster said.

Plus, most small businesses do not have the time, resources or expertise to chase down deadbeat accounts. Many are simply hesitant to follow up with long-time customers or personal friends in the community.

Says Schuster: “They’re in a very awkward situation, and by the time they realize they need to take action, it is often too late. They’re especially vulnerable because they do not have someone to do collections and do not want to incur the expense of going to an agency. They’re afraid of losing the business, even though the logic is questionable.”

As a result, they simply wait too long to act. Many businesses wait until they are in a serious cash flow crunch before they begin going after accounts. By that time, it’s often too late, said Beth Hinds, president of Specialized Credit Services, LLC in Fond du Lac.

“The problem doesn’t get any better by waiting,” said Hinds. “In general, the debt collection success rate for debts delinquent over 120 days is 50 percent.”

The best solution is prevention
The best way to solve a slow-pay-no-pay problem is to avoid it from the start. Here is what the experts recommend.

• Have a credit policy in place. This is the single best way to reduce late payments, said Len Sklar, author of The Check is NOT in the Mail. Unfortunately, he says, only 5 percent of companies have such a policy in writing.

• Discuss your credit policy with customers. “The minute you get a new customer, explain the payment process,” said Schuster. “Still, many businesses hesitate. They have a misconception that it will scare people away. At the minimum, include a paragraph in the contract. This sets expectations, and it goes a long way to avoiding problems in the future.”

• Have a contract. Everything should be in writing. “The business should use a contract to outline what service they will provide, how they will get paid and how much, and what will happen if the customer does not pay,” said Hansen.

“Before doing any work, I recommend talking to the customer about the costs and their budget. Then I have them sign a contract. If the customer wants to change or add additional products or services, have them sign and date a change order.

“In one situation, my client did not ask for a down payment when a customer ordered a piece of equipment,” said Hansen. “There was no written agreement or written commitment. The equipment was ordered and the customer changed his mind and didn’t want it and refused to pay for it.”

The business was stuck with the equipment.

“If my client had had their customer sign a contract or work order,” Hansen added, “they would have had some legal footing in small claims court.”

• Take deposits, retainers or credit card payments. “If they cannot prepay, there is a good chance they cannot pay at all,” explained Hansen. “If the customer does not have the funds to make a down payment now, where will the money come from to pay the bill at the completion of the job?”

• For bigger contracts, set up a payment schedule. On a $15,000 job, for example, ask for equal payments of $5,000 initially, $5,000 at the halfway mark, and the final $5,000 upon completion of all work. Also include sign-off on each step, with no work going forward without written approval of what has already been completed. 

• Consider credit applications. A small investment up front can save you thousands of dollars later.

• Tighten up due dates. Mark the due date on all invoices as 15 days.

• Focus on customers who can pay. It may sound obvious, but keep in mind that no business is better than bad business.

10 steps to take when the check is late
Even with your best safeguards, some customers will be late. What to do:

1. Have a system in place to deal with delinquencies. “Establish good collection practices. This means written policies and procedures that will be used as a guideline when dealing with collection problems,” explained Hansen.

2. Do not ignore overdue bills. The biggest mistake many business owners make is to wait until too much time has passed. The longer a bills goes unpaid, the more likely it will be uncollectable.
“Business owners need to remember that accounts that aren’t being paid rarely magically become current,” stresses Hinds with Specialized Credit Services.

3. Rebill promptly, the very day the bill is due.

4. Pick up the phone and call within a day of rebilling. Ask for explanations and remind the customer that the bill needs to be paid immediately.

5. Never apologize. This is money they owe you. Payment is not a favor. Listen and talk, but then be sure to ask the customer to write a check today for the full amount owed, explained Sklar.

6. Be firm but friendly. You should be understanding, but they must be reasonable. So, avoid arguments. Besides, backing that person into a corner will rarely get you paid. Remember, your goal is to be at the top of the customer’s payment list, not the bottom.

7. Ask for the full amount. If the customer wanted a discount, that should have been discussed before the job started. 

8. Negotiate terms, not amounts. If a customer owes $3,000, agree to monthly payments of $500, interest-free, provided the first check arrives in five days. Also stress that if a payment is missed or late, the remainder will immediately go to collections. No follow-up discussions.

9. Send a pre-collection letter. This should come from an attorney. Explains Schuster, this formal, third-party demand letter is often all that is required to obtain payment.

10. Start the collection process. Provide all information to the agency and let them handle it from there.

There are no guarantees that you will never have collection problems. Still, the above advice from the experts should go a long way to reducing the slow-pay-no-pay problem, and maintaining not only your cash flow, but also your peace of mind.

John Ingrisano is a Wisconsin-based marketing strategist and business journalist and a regular contributor to New North B2B. His monthly column, “Focus Small Business,” appears in Corporate Report Wisconsin. He can be contactedat john@TheFreestyleEntrepreneur.com.