As many of my friends and advisors are aware, I've had more than my share of deadbeat clients in the past few years. Unfortunately, bad debts due to deadbeat clients are a part of doing business. How you deal with these problems can make or break your business. Here is a little advice about how I've successfully rehabilitated some deadbeat clients.
Taking credit cards might make sense if it makes it easier for your clients to pay you. Be sure you document the delivery of your project or work, so you do not make it easy for them to try to make a chargeback against you later. Follow the rules of your payment processor very carefully. If you are delivering goods, use a delivery service that includes delivery notification.
When analyzing the situation of deadbeat clients, be aware that often your own collection practices are at fault. In today's economy it is easy to justify taking business from just anyone who comes along. But in todays economy, it is also more critical than ever to focus on your best customers. A deadbeat will sap your time and energy and creativity that should be invested in your best clients.
Don't be shy about getting paid. If you love the kind of business that you do, don't let things like not demanding to get paid jeopardize your dream job. According to Gene Fairbrother, president of MBA Consulting in Dallas, "Not having a good credit-and-collection policy is a common error with many small businesses."
A useful technique to avoid the deadbeat client trap is the feedback of others who care about your business. If your spouse takes an interest in your business, be sure to take advantage of their intuition. They may see things about your clients that you refuse to see.
Another way to create a deadbeat client is by improperly estimating the cost of various projects. If the client requires fixed price bids for projects, be very careful if the project is for something that you do not have a lot of experience at doing. It's one thing to make a menu that has fixed prices on it. It's another thing to go to someone's kitchen and try to make a good meal there when you have no clue what utensils, spices, and ingredients are available.
Track your time carefully, especially on projects that you might have a chance to do for future clients. For example, if you are in the business of creating eCommerce sites, watch carefully how long it takes you to create a certain number of items in their store, how long it takes you to set it up, and how long it takes you to train the typical new owner. When you have done a few of these sites, and accurately tracked the time each one took, you'll be able to estimate future jobs with confidence. Make a written price list for that kind of project while a previous project is fresh in your mind. You don't have to publish your price list, but keep it handy for reference when the customer is asking for the initial quotation.
If you find a project taking longer than it should, and it's the kind of project you expect to do for several customers, try to figure out some questions you can ask the next time, so that you can make a more accurate estimate of the price.
Once you have developed your price list, stick to it. Be clear what is covered in your estimate, whether it be a certain number of hours, a certain number of items, or whatever metric makes sense. And don't be shy about asking a portion of the price in advance. Because you'll already have some previous projects finished at that point, you can point to them with confidence and pride to show your new customer that you can deliver. A client who makes an investment of money early in his project is much less likely to loose interest later.
Many businesses insist on a 50% payment before they will begin work on a client's project. If it is something like a website, stage the website on a temporary server until it is complete. You can also keep the copyright for the site in your companies name until the final payment is made, but be sure to explain this to the client.
Of course you can be flexible. But trust your gut instinct. Being flexible when your gut instinct tells you the customer will take advantage of it, is just like chasing hunches at the blackjack table: You're almost guaranteed to loose. Be willing to pass up the problem clients. Let the problem clients waste your competition's energy.
Written contracts are important. Many customers like a one price for everything kind of contract. But be sure that your one price offers for projects are backed up by solid documentation of your own that the one price total includes all the appropriate component charges. And be sure to clearly state that additional pages, or substantial changes of the site need to be approved in advance. You should tell them what hourly rate to expect to pay for these changes.
Of course for a very complicated or long term project, you might want to bill in stages. Perhaps some of the fee is due when the design is approved, some is due when the first prototype is online, and the final payment is due when the site goes live on it's own domain.
When confronted with a client who has a history of being a payment problem, start thinking about how to prevent the problem in the future, before the amount owed endangers the health of your business. One of the best ways to prevent future problems is to bill against a retainer placed on deposit by the client. If you've provided good service to this client in the past, continue to earn their business when they have paid in advance for your services. I always like to say "Nothing I like better than turning a retainer into earned income."
If you have some successful projects completed already, don't be shy about getting a percentage of the price for new projects in advance.
If you have a customer that has a history of giving you payment problems, maybe it is time to take the emotion out of the situation, and make the situation much more simple for the client. Find the earliest possible stopping point to finish current projects for the client, and cease to do any further work, unless it is paid in advance. Often the client will complain that you are suddenly changing the terms of service, but unless a contract has been signed binding you to a certain method of business with this customer, you can let them know that al business from time to time have to readjust the prices that they charge. Concentrate on rehabiliting the customer if you have any further interest in their projects. Be gentle, but firm, with the client that if they desire more work from you, they must pay in advance in the future. Reassure them you are not out to throw them away as a customer, instead you are just wanting to simplify the relationship and remove some obstacles, so that everyone can spend more time concentrating on productive activities.
Make sure all invoices for time and charges are sent promptly. If you do not send out your invoice promptly, why should your customers be prompt about paying them?
This book covers cash flow continuum-from finding cash to start a business, to finding places to save cash and control expenses, to predicting and planning cash flow, to dealing with excess cash. It is written in simple, modern language, and speaks to everyday people who seek help in: keeping more of their sales dollars, making the right decisions about hiring, equipment purchases, obtaining funds from lenders and investors, and keeping their expenditures in line. This book will help the novice or experienced business owner find the hidden treasures that might be buried in business operations. Each area of business that affects cash flow is examined, with discussions about how its effect on cash flow can be improved. The reader will also find assistance with the complex task of projecting cash flow and changing plans as necessary to make sure that there will be adequate cash for operation at all times.
What do you do about customers who have already ran up a large tab, and don't seem to want to pay?
See if there is some small extra feature that, if completed, would encourage them to pay for the full project. Charge that extra feature in advance, at your full rates. Document this promise to pay in full upon completion of the extra paid in advance work.
Allow two weeks for payment. If two weeks later, no check has been recieved, call the customer to find out when they will pay. Keep a note of the exact time and details of the call. Documentation of your efforts to collect, and promises made by the customer, is important.
If the bill is not paid after a month, send a written demand for payment. Include a copy of your payment terms, preferably that were part of their original written contract. Request the check immediately.
About ten days after that, if still no payment is received, call the customer again.
5 days later, send a registered letter with a final demand for payment. Let them know they have 10 days to pay, after which you will begin collection efforts.
Before two months passes, check into recovering your money in small claims court,
If despite following all these ideas, you still end up with a client who can not pay you for work you have done, try not to take it personally. Maybe it's better to let the work already done be a donation. Call it a learning experience. If the work is something that can be shown to other prospective customers, take advantage of that.
Sometimes it's much better to concentrate on making new money than it is to agonize over dead money.
23June03, Garnet
Some more books about collecting from deadbeat clients that I recommend...
Garnet Chaney says "No information found at my web sites can replace a personal meeting with your physician about your health. Please don't just rely on the internet for your first opinion, but also seek professional help for any serious problem."
