When it comes to getting paid for your work, that old saying, "Hope for the best but prepare for the worst," is good advice. Having collection systems in place before you begin working and deploying them when it's time to collect can help you get the money you are owed.
Lay the foundation for getting paid when you and your client first agree to the assignment. Discuss your fees, invoicing procedures, and payment due dates before you begin the work, and document your agreement by using a written service agreement.
Set a payment schedule according to the assignment. If you've agreed to be paid upon completion of the assignment, set a due date such as 30 days from the invoice date. Consider requiring a deposit or partial payment at the start of the job when you are working with a new client. When the work will take months or longer to complete, a monthly payment schedule will keep the balance owed from becoming too large and will help you manage your cash flow more effectively.
Send invoices promptly according to the payment schedule you've arranged. Use good invoicing procedures that clearly state payment due dates. Consider including late fees in your service contract so clients know upfront that you expect to be paid in a timely fashion.
If you're not paid promptly, don't conclude right off the bat that your client is deliberately trying to avoid paying you. Invoices go unpaid for many reasons. They might get lost in a sea of emails or be misplaced. The person in charge of paying your invoice might be on vacation or trying to juggle many other responsibilities. Companies with cash-flow issues might put your invoice aside, waiting for funds to free up. A good rule of thumb is to start with a gentle reminder and make your requests incrementally more forceful if necessary. Here are some steps you should follow:
Send a debt collection letter. A debt collection letter is more formal than a reminder. It includes the date that payment was due; provides a time frame for sending payment, typically two weeks; the methods of payment you accept; and a statement about the action you'll take if you don't receive payment.
Your statement describing your next step can be a vague suggestion (such as "to avoid further action"), or a more forceful statement that you'll turn the matter over to a collection agency or initiate legal action. Your choice will depend on the time that has elapsed, the amount owed, and possibly your desire to salvage this client for future business dealings.
Make personal contact with the client by phone or a face-to-face meeting. If you don't receive a response to your reminders and letters, consider calling or meeting with the client to talk through the issue and negotiate a resolution. Begin by contacting the accounts payable or purchasing department or your client contact. If the person you speak with isn't helpful, go up the chain of command including the president of the company.
Begin by reminding the client of the payment terms that everyone agreed to follow. Ask questions that help you understand why you haven't been paid. If the reason is a simple oversight, getting the attention of the company through personal contact might be all you need to get paid. But if you haven't been paid because the company is experiencing financial difficulty, you might want to set up a payment plan or accept partial payment to resolve the situation without resorting to more costly and time-consuming actions.
How you go about collecting money you are owed might be as important as what you do.
Do be persistent. When it comes to collecting debts, the squeaky wheel usually gets paid first. A client who is struggling financially and has only enough money to pay one creditor, will likely pay the one who makes the most fuss.
Do be prompt with follow up. Uncomfortable as it feels, it's important to conduct all the follow-up steps promptly. It's easier to collect a smaller debt than a larger one, and letting the debt—and late charges—accumulate over months will only make it harder to get paid.
Do be polite and professional. Waiting to be paid is stressful to be sure, but it's important to remember you can catch more flies with honey than with vinegar, as the saying goes. You should not shout, be accusatory or threaten your client. Stick to the facts, be firm, and professional. You might be thinking something like, "Why don't you have the common decency to pay me?" But you should say, "I haven't received your payment, and it was due 30 days ago."
Don't keep working. If you're working on a longer project or an ongoing assignment for which you've agreed to be paid monthly or in similar intervals, you should discontinue delivering work after your client misses a payment. Sometimes letting your client know that you've stopped work will be enough to get you paid.
If you've taken the steps outlined above and your client still hasn't paid you, you'll have to decide whether to take your case to court or engage a collection agency. But if the client has gone out of business or vanished from the face of the earth, taking any additional action will likely just waste your time. If, on the other hand, your client has filed bankruptcy, you might be able to file a claim with the bankruptcy court for what you are owed. Check with the bankruptcy court in your state to determine whether your business and the type of debt qualifies.
Businesses that sell tangible goods or something similar can usually write off the debt. But the IRS generally doesn't allow these write-offs for service businesses.