#31 How do you deal with collecting money from clients?

by | Aug 4, 2020

About This Episode

As a business owner, one thing we all have to do is collect money from clients for our products and services. 

Today we are discussing the best ways to collect money from clients, otherwise known as accounts receivable or A/R. We’re going to start with how to create expectations from the very start with your clients, defining your payment terms, and what to do if a client doesn’t pay you. I’m covering what forms of communication you can utilize and how long you should wait, along with how kindness can go a long way.

Let’s collect your money!

What we’re talking about

  • Creating Expectations For Your Clients
  • Defining Your Payment Terms
  • What Do You Do If A Client Doesn’t Pay On Time?

organize business finances

Creating Expectations For Your Clients

Creating expectations for your clients about your payment terms should start well before your first invoice is sent to them. You should set up the parameters and boundaries in your initial call, your contract and your onboarding emails, so that your client is informed and fully understands your payment expectations. 

In addition to the payment terms, you should inform your client as to what your billing process is. Answer questions like:

  • How often will you bill? 
  • When will you bill? 
  • How long will they have to pay your invoice? 

Clearly define your payment terms, how long they have to pay you, and what happens if they don’t pay you on time. 

Defining Your Payment Terms

One of the biggest parts of collecting money from your clients is defining what your payment terms are. They can vary from “due on receipt” which means the invoice is due as soon as it is received or you could offer payment terms of 7 days, 14 days, 30 days or more. 

How long you offer depends on your needs and the needs of the client. For example, large corporate clients often need 30 days (or more) due to the size of their accounting department and internal processes. 

When defining your payment terms, consider your own cash flow and when you need money to come in. If all of your payment terms are 30-60 days, you’ll have to wait at least one month or more after you’ve completed the work if you bill upon completion. Can your business pay its bills (and pay you) while you wait for payment?

In addition to payment terms, define your billing process. When will you bill your client: before work is started, midway, after work is complete (or a combination of these)?

What Do You Do If A Client Doesn’t Pay On Time?

You’ve defined your payment terms, sent your invoice and the due date is quickly approaching, but your client hasn’t sent you a payment. What happens now?

Many business owners apply a late payment fee to overdue invoice. The late fee can be:

  • A flat fee (ex. $25)
  • A percentage of the invoice (ex. 5% of the total)
  • A rolling late fee in which a percentage is charged after being so many days late and accrues as the days continue (ex. 5% every 10 days the invoice is overdue)

The late fee is meant to be a deterrent from paying late, not to be a money making scheme for you. Strike a balance between it stinging a bit for the client (so they want to avoid it) and not being completely unreasonable. 

As a courtesy to clients, send them a reminder a day or two before the invoice is due and reiterate what the late payment policy is. Once the invoice is overdue and the late policy has been applied, send them another reminder restating the late policy to ensure that your client is aware of what’s going on. You can reset the deadline but the next due date should be a shorter time frame than your original deadline. 

If you still don’t receive payment, you can escalate things with a phone call. But, don’t just call your clients and berate or shame them for not paying you on time. Check in on them to make sure everything is okay with them in their business and personal life. Approach this entire process with kindness. 

So, what do you do if a client refuses to pay you?

You’ve got a few options. First, you can come to terms with the fact that you’ll never receive payment and let it go. Depending on the amount of the invoice, this might be the least emotionally taxing option. 

If you want to take further action, you can use a private collections agency, but remember that they will take a fee of whatever they collect on your behalf, therefore you’ll never receive full payment. Collections can do damage to your client’s credit and your relationship will most likely be lost. 

The last option and the last resort you have is to sue your client. If you take legal action, decide if it’s worth it to you. Here’s a helpful guide to suing for non payment of services

Have you defined your payment and collection terms?
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