How to collect debt from late paying clients.jpg

How To Collect Debt From Late Paying Clients

Publish Date: 21 Oct 2019

I constantly have clients that just don’t pay. When I was an accountant it felt like I was spending half of my day chasing people for payment of invoices that were months overdue. It took me years to come up with a procedure for collecting outstanding debt and this is what I’m going to help you create today.

When running a small business you rely on customers paying on time to support your day to day activities, that is why it is so frustrating when they don’t cough up the cash. It’s normally the same problems that arise from late payments, you don’t get paid, your suppliers get angry because you are making them wait, or you get stuck and end up writing off the debt which means your business is giving out work for free. The tools I will be providing in this article are general templates that you can alter to fit your businesses needs. Also I am giving you some tips to get payments quicker and what you can do when extreme measures need to be taken.

Don’t get angry and ask why payment is late

The number one thing you need to stop yourself doing, is being angry with the customer. More often than not they are waiting for payments themselves and being mean or threatening will only make them reconsider your services. Be calm when contacting clients about outstanding bills, help them understand why you need the money, and how unfair they are being, after all you have provided a service and deserve to be paid.

When speaking with clients that have outstanding invoices with you it might be a good idea to ask why the payment is late, or if there was something wrong with the bill. They will probably give a really good excuse like “I’m just waiting until ‘my’ customer pays” or “I haven’t had a chance to get on my bank”. I have fantastic responses for these later on. But most importantly you have to believe whatever they tell you, as soon as you question their integrity it makes speaking to them very awkward and they will dodge you from then on.

If you stay calm and stick to your guns you will create a much nicer environment for communication between you and late paying customers.

Email & Phone call scripts - create resource

Emails are a great way to convey concern over a payment, you can include statements and invoices for reference and give full breakdowns of consequences that could arise from overdue payments. The reason why I would always send an email is so I have documentation of all communication between the two parties in dispute.

You need to word emails correctly to be effective. You can get an email template here.

The email template has two main functions, to make the client aware he/she has outstanding invoices with the company, and encourage them to get in contact via email or phone. Once you have a response from the client, you can then go on to questions and gently push into paying the invoice. I use software and payment systems that allows me to collect payments when you finally get in touch with the customer.

If you are lucky and they admit guilt, you can play on that remorse to get the payment. It’s all about psychology. If the customer feels guilt they know they have wronged you, then you can come out as the bigger person by offering peaceful solutions to the problem. You can start the process of rebuilding the relationship between you and your client.

Payment methods

There are plenty of payment systems you can choose from when it comes to automating the admin process of paying bills. I’m going to walk through a credit card system, a direct debit provider, and a till and card machine option.

  1. Stripe

We’ve all either heard of Stripe, used it in our own business, or paid through it. It is probably the biggest outsourced payment system on the market, it is safe, fast, and reliable. It works on the basis a customer can open a pdf of an invoice and click a link to ‘pay now’, this then takes them to a page where they enter their credit card details and the payment is actioned.

This is a great tool to use over the phone. If you have a client on the phone you can ask if they would like to pay now and I bet they will say yes more than no, you collect their card details and enter them into stripe and collect the amount on the invoice. You will have to be careful with taking card details over the phone, I would consult a solicitor or online forums before you attempt it as different countries and states have different legislation regarding payments over the phone.

  1. GoCardless

This is our direct debit option, we highly recommend this system to anyone who invoices on a periodic basis, whether that be weekly, monthly, or quarterly. It is also good for landlords, if you struggle to collect rent from tenants you can make it a requirement in the rental agreement that they sign a direct debit mandate for the rent amount.

The best feature of GoCardless is the fee structure, they are capped, the percentage charged per transaction is 1% and then caps out at $2.50. So if you wanted to collect an invoice worth $5000, you would only pay $2.50 in transaction fees.

My final point about GoCardless and direct debits in general is getting your client on one may be hard to begin with, but once you have the mandate set up the money will continue to be collected until you stop sending invoices. The accountancy practice I was a part of made it company policy that all new clients had to sign on to a direct debit mandate, we lost a couple of people because of this clause, but these people would have been exactly what we didn’t want, clients who didn’t pay. We only worked for clients who had systems in place to protect us from bad debt.

  1. iZettle

This one is more for shop owners or product providers. iZettle as a software alone keeps track of stock, has re-order procedures built in for items that run low, and comes with its own POS system.

The online dashboard shows you live sales data via card and cash transactions through the till. It also has reports that show you what your best items are, and what time of the week/month/year people are buying certain products. For a business that operates a till, this is the most sophisticated system in my opinion. However the fees reflect how good it is.

There are 2 different subscriptions, standard and pro. On the standard you only pay fees on money you make, and on pro you pay a monthly invoice. For a small business the fees aren’t bank-breaking but my advice would be, if you are making more than $1000 a week you should shop around for a different POS system but keep your online portal as the POS devices are what cost you money and there are cheaper options out there. But the portal is definitely worth the monthly subscription of $35.

Know your rights and document everything

If a debt collection ever gets out of hand, you need to know what you can do. The first thing I would do is gather a collection of all the communication between you and the client, then any time logs or physical evidence that you have completed work for the person or business. Then it’s down to you to go through the courts, you need to hire a solicitor or debt collection service, ideally on the basis of ‘no win no fee’. Depending on where you are in the world the law surrounding debt collection might not leave you with many rights, but in some cases, especially for large amounts of money you can action your county's money claim centre which deals with business to business debt disputes.

I am not a solicitor so before you action any court proceedings I would highly recommend you spend a small amount of money consulting with an expert in the field. They will be able to give you an action plan and guide you through the correct channels to protect yourself when collecting debt. Some debt collection services offer this as well but they may charge rates on what they collect, so this would only be an option for me if the amount was substantial.

Debt disputes can get ugly fast so you have to be mentally prepared before diving head first into legal proceedings. If you do end up taking people to court they could lie about you, be derogatory about your business and service. I had a case where they filed for closure on their limited company and restarted it to prove no service was provided. But the judge was kind to my small business and we got the payment.

You just need to keep your head on straight and focus on the clients that pay you on time.

 

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