Getting paid on-time is always a concern when you work for yourself, when you are self-employed, are a freelancer, or own some other sort of small business.
Back in the day when I was a young lawyer trying to launch my law practice, I had a potential client come in the door. He needed to file bankruptcy and asked me whether I would agree to accept half of my fee up front and half in 30 days. Since, as I said, I was new to business and had a family to feed, I agreed to his proposition. New clients were good.
If clients cannot afford to pay you when they really need you, then they probably can’t afford you at all.
I dutifully filed his paperwork and began his bankruptcy proceedings. Then, about a week later, I received notice that he was dismissing me as his lawyer. I didn’t get it. Then, about a week after that, I received a notice in the mail that I was being named as a creditor in his bankruptcy. Then I got it. He essentially used me to get a BK filed for half price, the other half being written off in his case.
Hoisted by my own petard!
But it was a valuable lesson: If clients cannot afford to pay you when they really need you, that is, when they hire you, then they can’t afford you at all. Now, of course, there are many times when it behooves the small business to be flexible and work with customers regarding payment, especially in an economy like this one. But being flexible and being a softie are not the same thing.
Flexible good; softie, bad.
Here Are Some Tried and True Methods for Getting Paid on Time, Consistently
The carrot: We all have seen it: An offer of a discount if we pay our bills early. It is a good strategy. By offering 10% off for early payment, the business gets needed revenue in the door, the customer gets a welcome discount, and the relationship is strengthened.
The stick: Another option is to have a clear policy stating that late payments will incur a penalty. No, you don’t like doing this, but yes, it does work. The key is two-fold:
1. As indicated, be clear and up front about the policy. Make sure that clients and customers know that late payments are frowned upon and that as a result, you have no choice but to tack-on a late fee for late payments.
2. Enforce the policy consistently. Letting people slide, or worse, not enforcing it at all, makes you a paper tiger. You don’t have to be a jerk about it (although sometimes you do, see below), but enforcing your late-fee policy consistently will result in fewer late fees and more on-time payments.
Follow-up: Assign an employee the task of following up with the late-paying customer. Be sure your staff member relays the gravity of the situation and explains that paying late, while sometimes understandable, makes running your business difficult. An email or letter can work, but a phone call may work better.
Be flexible: Try expanding your forms of payment. For instance, getting a merchant account and beginning to accept credit cards can make things much easier on clients. Or what about PayPal? In extreme cases, consider the barter option.
Tougher Methods May Be Your Last Recourse
Get paid up front: Why do car dealers ask for a substantial down payment when selling a car? Because the lender knows that you have a far less likelihood of defaulting on the payment when you have some money already sunk into the deal. The same can be true for you – getting an up-front deposit, down payment, retainer, etc. works well.
Stopping work: Your choices get tougher the further down this list you go. It is of course always an option to explain that works stops until bills are paid. That gets people’s attention.
The jerk: You need to be very careful with this one, but there are times when clients take too much advantage, and when that happens being more forceful than not can help. I have written before about the power of what I call “the calculated blow-up.” No one likes dealing with people who are upset, so getting upset (on purpose and within reason) can work. The caveat is that you don’t want to blow-up the relationship (unless you do).
Of course you don’t want to lose customers over a payment issue, but then again, some of those customers tend to be more effort than they are worth.
We’d love to hear your story about how you worked out your accounts receivable situation — so why not share with us, and guest post in The Self-Employed blog today?