Making a sale may seem like the hardest part of your job when you’re a business owner. After all, a lot of work can go into convincing someone to buy your product or service. But that’s really just the beginning. You then have to deliver what you’ve sold— and get paid for it. Sometimes that last part can be the hardest. There are clients who will string you along for payment, or just disappear when it comes time to write a check.
If the check is not in the mail, here are four things you can do:
Write It Off
You’ve heard the saying, “Don’t throw good money after bad?” Sometimes you’ll find it doesn’t pay to pursue a deadbeat client. You simply have to acknowledge the fact that you’ve been ripped off and move on. Signs you may never collect can include when “a client stops communicating, changes contact information or goes out of business,” says Caton Hanson, Nav’s Co-founder and Chief Legal Officer and owner of several small businesses.
If you do have to write off payment from a client, keep in mind that business bad debts may be tax deductible. The rules (as always) are quite specific, so make sure you get good advice from an accounting professional.
Send It To Collections
A collection agency may save you time and frustration so you can focus on other business. Keep in mind they will take a portion of any money they collect (as much as half) and some may have upfront fees. However, you may be able to sell your debt to a collector. “That way, you at least get some money upfront and are then done with it,” says Hanson. “The debt is then legally the collector’s and they get to deal with it how they want.”
Ideally, you’ll want to start working with a debt collector before you’re desperate. “You really need to jump on it within thirty days because if you wait 90 days you aren’t likely to collect,” warns Garrett Sutton, small business attorney and author of Toxic Clients: Knowing and Avoiding Problem Customers. Also, if your client is truly unwilling or unable to pay, they may not have any more success than you did.
Investigate collection agencies carefully. Some specialize in certain industries, and commission structures vary. Additionally, while collectors pursuing business debts aren’t subject to the same strict regulations as those that collect personal or consumer debts, you don’t want a rogue collector ruining your businesses’ reputation.
File a Mechanic’s Lien
Certain types of service providers, such as plumbers, electricians and carpenters, as well as jewelers and auto mechanics, may be able to file a mechanic’s lien against the property they have worked on. The lien will remain in place until the debt is paid or the property is sold. The procedures for filing mechanic’s liens vary by state, so it can be helpful to get consult with an attorney. Although this may not net you payment right away, it could feel better than writing off the debt. You’ll at least know you’re likely get paid eventually.
Go to Court
You may choose to sue the company that owes you money, either with the help of an attorney or without. Keep in mind that if you do hire legal counsel you will likely have to pay at least some of the attorney’s fees upfront, and there is no guarantee you will recover any money even if you win. You’ll have to weigh your chances here to decide if it’s worth a shot.
Tip: Checking the business credit history of the company that owes you money may help. If you see the company is a high credit risk then your chances of collecting are probably lower. On the other hand, if you think there is a chance of collecting, a legal judgment can give you a priority over other companies that may try to collect from that client. (Check the credit of up to 5 companies with a Nav Business Manager, Business Boost, or Business Loan Builder account.)
If the amount your business is owed is relatively small, you may be able to take your client to small claims court, saving you attorney’s fees and collection costs. Each state sets its own limits for small claims court, and it usually ranges from $2500 to $15,000, though $10,000 is a common limit. (This chart from Nolo provides a state by state breakdown of small claims court limits.)
You’ll need to provide proof that that client owes you money. A clear contract is best, though email and other correspondences may suffice in some cases. Going to small claims court “is fun,” says Sutton who describes the process in detail in Toxic Clients. “You’re out there fighting for justice.” He recommends going to court to observe before you pursue your case there so you can get a feel for how it works.
Hanson agrees that spending some time observing small claims court can be invaluable. It allows you to see how the judge handles these cases. “Knowing what they are annoyed at or like versus what they think is important or trivial are things that can win a case,” he says. “By observing a few times, you can glean those important details. A courtroom’s bailiff is also a good source for similar information.”
Just because you win your case doesn’t mean you’ll walk out with payment, though. The judge may issue a judgment against the defendant (the company or individual you sued) but then it’s up to you to collect that judgment. You may or may not be successful, and you may still have to hire an attorney to help you collect. Sutton notes that you may be send a sheriff in to collect the money you’re owed directly from client sales. That threat alone may be enough to convince your customer to pay up.
Don’t Be Fooled Twice
To protect yourself from getting stiffed in the future, make sure you:
- Get and use solid contracts. Build in specific penalties if clients or customers don’t pay on time and consider offering a discount for quick payment.
- Check business credit reports before you provide any goods and services that aren’t paid for upfront.
- Shop for a collection agency before you need one, then let clients know you will turn an invoice over for collections if it’s not paid.
- If you regularly extend terms, consider reporting to commercial credit reporting agencies. Letting your clients know their payment history will appear on their business credit reports can be an incentive for them to pay on time.
This article was originally written on July 7, 2017 and updated on September 18, 2019.