Deter Deadbeat Debtors: What are the Red Flags?
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Purchasing goods and services is one thing, but paying for them might be quite another. If you haven’t received the money yet, it may be too soon to celebrate! With slow-paying — or even nonpaying — customers or clients, your bottom line can go south in a hurry. This is even truer when large amounts of money are involved.
First, it’s important to start by trusting your instincts about your customer base. Stay aware of situations that aren’t necessarily the right fit for your business. And to stay on top of collections, be aware of these red flags:
Anonymous clients. Some prospective customers don’t seem to exist anywhere other than, say, a vague email address. This is a sign to move cautiously. It’s not too much to expect that even start-up businesses have some sort of online presence, a true location, and a working email address and phone number.
Empty assurances. One warning sign is clients who ask that work on their product or service start immediately, but without providing assurances that payment will be forthcoming. In some industries, it might be common practice for suppliers to provide goods or services, and follow up with invoices later.
When that’s not the case, however, consider the lack of credible assurances to be a warning sign. That’s especially true if a prospective customer is vague on the budget for a project.
Future earnings as payment. Customers who promise some portion of future earnings as payment may be legitimate. But, before you begin work, nail down the terms and decide if the potential reward compensates for the risk.
How realistic are the visions of success? And what happens if, despite everyone’s best efforts, the new idea never takes off?
Perpetual nitpicking. A client who regularly nitpicks most elements of a project may keep it from ever getting off the ground. While clients have a right to expect the level of quality promised at the outset of a project, those who seem to continually search for reasons to criticize products or services may be using their purported dissatisfaction to avoid paying for their purchase.
Steps to take
Even business owners who pride themselves on distinguishing good prospects from bad don’t always get it right. If you’re skeptical you’ll be able to collect from a customer, it’s wise to ask for a retainer or deposit up front before starting a project. You can also request progress payments while the project is in process. In addition, the following steps can help:
Politely but firmly follow up. A tactful email can provide a gentle nudge when an invoice is overdue. For example: “It looks like Invoice #1000, dated April 1, 2017, for $500 (for 25 widgets you purchased), may have been overlooked. In case it was lost, I’m resending it.”
This message lets customers know that you’re aware of the payment due, yet offers them the benefit of the doubt. Most people want to operate ethically, and even prompt payers make mistakes from time to time.
Move to a phone call. If your follow-up email(s) aren’t generating a response, a polite phone call should get the client’s attention. Many people find it harder to ignore or say “no” to someone in an actual conversation, as opposed to an email.
Try the customer’s accounts payable staff or business manager. If previous efforts aren’t working, a shift to the accounts payable or business manager may be more fruitful. But remain courteous. It’s possible that the invoice truly is lost or is stuck on someone’s desk. And this may be the first time the person learns of the payment delay.
Delinquent payments aren’t fair, and they can damage your company’s operations and profitability. So be polite, but assertive, when you find it necessary to pursue missing payments. With many customers, persistence pays off. Then again, if you have clients that continue to withhold payment, it may be time to take legal action. Your financial advisor can help you sort out your options.