Banking

What to do when your client doesn't pay

Chip Camden offers tips on how to get your client to pay you on their own volition, continue to be your client, and pay you on time in the future. He also shares the single most important thing you can do to insure timely payment.

 Your never noticed that echo in your mailbox until a client's check doesn't arrive when it's due, but you shrug it off and figure they must have just missed the mail. The next day you ask the carrier if it's possible something was missed, and you look around on the ground to see if the envelope might have been dropped. You call your client, but they don't answer, so you leave a message and follow it up with an e-mail. The sun sets and rises again without bringing any response. Like the grounds in your coffee mug, the bitter realization slowly settles in your mind that your client doesn't intend to pay you any time soon, if at all.

What can you do? The answer depends heavily on what you've already done, or failed to do.

First, you should cease any further work for this client until payment is received, and tell them so. But that may not have enough bite, especially if you've just completed a project or if there's any doubt about the value of your contributions. If you have a strong contract, you could get your lawyer to send a letter and threaten to sue. If you only have a verbal agreement, you may still be able to take legal action but that should be a last resort. Even if you're successful, you haven't really won. That's like defining a good landing as any one you can walk away from.

What you want instead is for your client to pay you on their own volition, continue to be your client, and pay you on time in the future. Here are some things you can do to make that happen.

  • Start with a helpful attitude. Treat the nonpayment or late payment as a problem that must be solved together. It may have just been an oversight, so don't jump the gun. But if it turns out that the client has a systemic issue with timely payment, then you may need to make some changes to help the client live up to their end of the agreement.
  • Offer a discount for early payment. With this strategy, your client can save money if they pay you very promptly -- say, within 10 days after invoicing. But you must not give any ground on this. If the check arrives on day 11, it's "no discount for you!" no matter what the excuse. Otherwise, they'll gradually stretch you out until they're taking the new discount on the old terms.
  • Change your terms to require payment in advance. The client buys so many hours at a time, and you let them know when they're getting low. This doesn't have to be presented as a punishment, either. You can offer the client a discount for paying in advance -- and in this economy, many companies prick up their ears when they hear "discount." I recently followed this advice to good effect with a client who had a history of late payment. My only mistake was not requiring a minimum purchase -- now they're constantly running out of hours, and I have to stop working until they send me more money. Once you establish this policy, the one thing you never want to do is to perform work before the money arrives.
  • Impose a penalty for late payment. This is a common suggestion, but personally, I don't like this one very much. First, it never seemed to work -- the client treated the penalty as a reasonable interest rate on a loan I never meant to give them. Second, the penalty legitimized the late payment, which therefore became even later. Third, punishing your client can't improve your relationship.

It's possible that your client is voting with their checkbook on the quality of your work. That's not a very effective or ethical approach to a performance review, but I've seen it happen. In that case, you need to do two things immediately:

  • Make it absolutely clear that you expect and desire open communication about any dissatisfaction with your work and that violating the terms of your contract is not an acceptable form of communication.
  • Fix the problem -- provided that they'll let you fix it and that they'll pay you on schedule thereafter. Clearly define what the problem is and what will constitute a resolution.

This brings us to the single most important thing you can do to insure timely payment: provide great value for your fee. Your client should have a good reason for wanting to keep you happy, so they don't risk losing your services by withholding or delaying payment. I won't pretend that your contributions will automatically be recognized -- some people and organizations just don't get it. But if you consistently create a superior value proposition, you will eventually attract more appreciative clients. Then you can afford to kiss the deadbeats goodbye.

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About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

59 comments
aharper
aharper

Our service contracts are usually Net30 with interest penalties for late payers and the usual legal clauses. The customer must sign the contract to authorize the work before we even unload the tools from the truck. It should be noted that we are one of 2 computer shops in town and we are nearly partnered with the other one. We charge the same and while he does in shop service, we do on-site. Given the rarefied environment here, your mileage will probably vary in other industries and locations. Here is how we deal with non-paying customers: Step 1: The day after job completion. Routine follow up checking on customer satisfaction, tech professionalism, etc. Remind the customer of a 10% discount for paying their bill in full within 10 days. Step 2: 30 days The phone call. Nonconfrontational, help them remember their bill. Step 3: 60 days. The second phone call. Still nonconfrontational, but this time reminding them that interest has accrued and their bill is now $$$. Step 4: 90 days. The last phone call from me. A courtesy call notifying them that their terms are now cash due on completion, and their account will be turned over to an attorney within the week. Step 5: 90-120 days. The attorney sends them a letter or two at his discretion. Step 6: 120 days. I show up with my attorney and the county sheriff. In addition to the writ from the lawyer and court filed documents, they receive a letter from me instructing them to call someone else for tech issues, as they have been blackballed due to non-payment. I walk out of the building with the equipment I worked on as a mechanic's lien and tell them they have 60 days to settle their account before I sell the equipment. At this time their bill is frozen and no longer accrues interest. Step 7. 180 days. I wipe the hard disk or configuration files of the unit and sell it. I apply the sale proceeds to their bill, which includes interest, attorney and court fees. In reality, I'll probably donate the equipment to charity and write off the debt as a charitable donation. Now, if during steps 1-3 I find out that the customer in unimpressed with our work, I fix it on the house, but only after they pay their bill or at least make a good faith payment. I have only had to go to step 6 once, and that customer was no loss. His lights were turned off 2 days later due to non-payment and his former employees are suing for their wages. The point is, in the process of working to be regarded as a nice guy, don't be someone's sucker. Don't waste a lot of time or good money chasing bad money. The difference between good money and bad money is good money is in your pocket. Bad money never will be.

kgunnIT
kgunnIT

Great article, some good advice! I recently worked for a client who said she wasn't going to pay for all of my time, only what she that was fair. I billed for all of my time anyway, and got the check invoice paid in full. Next time, I will make sure to have a written contract for this client. Can't trust anybody, not even those you think are your friends. I am told there is a website, I will have to search for it, where you can report unpaid clients. This goes on their report and other businesses can use this site to see if their clients are pay-worthy. Bill for your work regardless of any phone conversations, and don't rely on adding interest to unpaid balances. If they don't pay you immediately, what makes you think taking on interest will get them to pay? Aside from my side business, I work for an electrical company and they try to add interest to unpaid balances, this has never worked.

Cerebral*Origami
Cerebral*Origami

Personally I like to leave a severed horse's head on thier pillow. >8^)

JohnMcGrew
JohnMcGrew

...and then has a minion call for support when something goes wrong. Doesn't happen often, but it has.

reisen55
reisen55

In some cases, the client is having genuine cash flow troubles. Not always, but if this is so (and as a consultant we, ourselves, should be familiar with this issue and have EMPATHY for our customer) use this as a way to modify the payment arrangement to accomodate the client's needs. Use it is a positive to keep the income coming in. If the client is in genuinely bad financial condition, I would (and my father's international consulting company did this) modify the payment to a minor fee for, oh, three months or so. Keep a dollar commitment from the client at all costs. Better to get something now, however slim, keep the client for better times when they come around. I use a dual tier approach for my clients now: a retainer fee for basic work, precisely outlined, and then a project-emergency service fee for the unusual events as they may occur. These, too, are precisely defined. I give the customer payment flexibility on the project and emergency service work if I have to and keep the retainer fee as standard as possible. Giving the client a helping hand is usually reciprocated, too, when WE NEED A HELPING HAND which is also a good thing.

mikifinaz1
mikifinaz1

The first step in any business is to hire an accountant and a lawyer, dah

seanferd
seanferd

I like the way you think! There was someone in the forums recently who was asking about this very subject. Wish I could have pointed him here. Heck, I think I will. Time to dig.

ssharkins
ssharkins

I think it happens to us all and forewarned can certainly help. It's one of the reasons I don't work "by the project" anymore -- I charge a flat hourly fee, and they pay it on time, or I stop working. (Well, I wouldn't do that to an established client who always paid on time -- that requires a bit of faith...) I've been burned more than once. Once, the project was nearly finished, except for a few interface gadgets, and I'm convinced he had an in-house employee with Access experience finish it up -- never paid me, never answered a single call... nothing -- just flat stole it. Since my projects are mostly small, the idea of paying a lawyer is out -- simply not worth it. And that makes it easier to charge as we go too. But then, there's the other side of that -- the people who insist on a retainer when they don't have any real work for me at the present time, or... now, this was sweet -- the guy who paid me for my time when I wasn't even going to charge him! I did a little research, talked myself right out of a nice project because the next upgrade was going to give him exactly what he needed. I told him no charge, he asked me how many hours I'd spent on it, I told him, and a few days later I got a check! Nice! ;)

Sterling chip Camden
Sterling chip Camden

I imagine you get a lot of takers on that deal! Since I don't do hardware, I couldn't impose the equipment lien you describe -- about all I can do is cease further work and threaten with legal action.

PMPsicle
PMPsicle

I typically don't do work for small companies and the big ones pay ... slow sometimes but they pay. I made the mistake of doing some work for a person who was quite successful (I thought) as a favour for future joint ventures. I did it not only at a discount from my usual retail rates but at a sizeable discount from the usual rates for that type of work. (I also don't normally do that type of work). The problems started as soon as I showed up ... she had a fight with a client over her bill (and told the client to go elsewhere) and then started to bitch about how other people bill her and don't deliver. And then she launched into a complaint about an accountant who charged her BIG bucks (all of $25/hr) to clean up her books for her. And naturally, she found an excuse to not be around when I finished. Needless to say, I made sure I could pull out competitive quotes for the work. And I sat down to decide if I wanted to even pursue the bad debt I knew it would become (hint to self in future, don't do this when you're T'd off at the client!) Every month she got sent a bill for the interest and then a little later a statement for the amount owing. And a few days after an email asking for payment. The net result was it got to the point where she was fighting with me over charging tax. I ended up having to chase her for 9 months to get the final amount of the bill paid. Not to mention getting a ruling from the appropriate tax authority. It finally took a statement that I was going to see my lawyer in x days and that if she wanted to not be a subject in the discussion I needed payment prior to that. Heck of a lot of work (and aggravation) for very little money -- and no chance of future joint ventures. I found out later that she was barely scraping by and well below normal earnings. All the "I'm a great salesperson" was smoke and mirrors.

Sterling chip Camden
Sterling chip Camden

Then I tell the minion that I'd love to help them, but their employer needs to pay their bills first. Do that once, and they'll never send the minion to do the king's bidding again (of course, you may lose the client).

Sterling chip Camden
Sterling chip Camden

I have on occasion extended terms (while ceasing all work until paid). As I mentioned in the post, you can also change terms to prepayment and make it a positive by giving them a discount. Then they pay as they go and feel good about it.

TX-Netware
TX-Netware

The only time I've ever had to sue a client it wound up costing me over $5K to collect $1.7K of a $3.6K debt. The client represented himself and lied like a rug on the stand and the jury gave him a "pity discount" on what he owed me. Since then, prepay time and deposits on equipment or I don't work.

Mark.Moran
Mark.Moran

Instead of resorting to the expense of a lawyer, a specialised debt collection agency may be quicker and cheaper.

Sterling chip Camden
Sterling chip Camden

You don't really want it to bite anyone, it's there just to keep them from trespassing. And you really don't want your relationship with your client to get to the point where the lawyer is needed.

TX-Netware
TX-Netware

I just installed an EMR app for a client that the EULA states explicitly that the app is able to be remotely crippled in the event of non payment or even a bad attitude.

santeewelding
santeewelding

You get to think that way, as far as they have both gone, only after having living and doing and agonizing over it. Think beforehand without experience all you will. It will not prepare you. You get to make it up as you go along.

LarryD4
LarryD4

Whether its an MS-Access Project or a C++/VB.net app, code in some type of crippling code so if the client doesn't pay the product stops operating or gets really annoying. When I have created custom apps for clients, specfically the small to medium size client. I usually write in some code that will either cripple the software or start annoying pop-ups that the bill wasn't paid. The code is set to go off 6 months in the future and if they pay their bill before hand or have worked out a payment plan with me. I just go back to the app and pull out the cripple under the guise of just checking on an issue about a patch or something. So if I do nothing and the client hasn't paid their bill. The users start getting popups that the bill wasn't paid and if you want these 5 minute pop ups to go away, you should pay your bill.

Sterling chip Camden
Sterling chip Camden

The last one you mentioned, that is. I have had a few clients who were studious about making sure I was kept happy -- but most consider your fee to be a necessary evil.

kgunnIT
kgunnIT

What people don't realize is, when you don't pay your bills, things get ugly. If she was struggling with her business, why didn't she say so? If a client comes to me and says, "Hey, I know I owe you money, things are tight in this economy, can we set up a payment plan to pay the balance?" I'd be okay with that, through in a little interest and as long as the client pays, I won't be worried. It is when a client just "disappears" that I hate. When you don't return calls, don't respond to emails, and don't pay your bills, that's what gets you into trouble. This is true also with credit cards and loans and what not.

Sterling chip Camden
Sterling chip Camden

I've seen it a hundred times -- those that need to talk about their meteoric successes are the very ones about to experience collision with the ground. The worst I had was a nonpayment for about four months -- but it was for a week-long on-site, so it was a significant portion of a month's receivables. I finally got them to pay, but not before going through some lean times. I definitely should have required a portion in advance.

JohnMcGrew
JohnMcGrew

...such as that I have other clients on the line who pay on-time. People who pay latest fall to the bottom of the queue. But there have been times where I've just had to say "Are you kidding me? How long would you stay at your job if the paychecks stopped coming?"

apotheon
apotheon

you may lose the client "Lose" a client that won't pay . . . ? Where do I sign up?

PMPsicle
PMPsicle

There are two main reasons to avoid the use of collection agencies (except as a last resort). First, they take 50% of the amount they collect. So once they get involved any profit and most of your costs are gone. Second, they only care about collecting the bucks not retaining the customer. So their actions often flirt with the border between legal and illegal (forget ethical they usually are way over that line). They have even been known to attempt to overthrow the bankruptcy laws in their quest to get that last penny from people who have nothing left. Using a collection agency should be the LAST possible option. Besides, most of them will only do consumer debt.

seanferd
seanferd

You'd probably want one on retainer for such things. Even if retention is not involved, the cost in time and fees will probably end up being more than what you could end up getting paid. Larger businesses can definitely make more use of this angle, but for the smaller guy..?

herlizness
herlizness

> crippled app for a "bad attitude" ? don't try that with any clients who have any brains the problem with crippling apps is that what you have is a contract claim against a non-payer ... the law provides a remedy for you but it isn't self-help and intimidation; you sue for non-payment; remember that some clients consider that they have a defense to your claim and they are entitled to assert it You might instead write up a license which stipulates that in the event of non-payment client agrees that the license to use the software is terminated and take it from there ...

Sterling chip Camden
Sterling chip Camden

... learn more from others' mistakes, I'd be a lot better off. You're right -- I always seem to have to learn things the hard way. But perhaps some readers can be smarter than I have been.

markus
markus

Your solution sounds good, but it is totally illegal. In the eyes of the law, "you can't take a bas situation and make it worse."

PMPsicle
PMPsicle

There are two main problems with your solution ... 1) Not all of us produce software. I, for example, only produce software when I don't have enough real work to keep me busy. I produce reports, recommendations and guidance. Hard to stop them using that. 2) It's illegal (and if not out and out illegal in your jurisdiction, it's very borderline). Glen Ford, PMP http://www.trainingnow.ca

Sterling chip Camden
Sterling chip Camden

Unfortunately, most people put off what they dread, and everyone dreads the conversation with a creditor they cannot pay.

PMPsicle
PMPsicle

Fortunately, this was a give-away job (about 0.25 - 1/3 my normal rates) even before I threw in free time to make her feel good. If she hadn't done such a good job at P***ING me off, I'd have just given her a discount and swallowed it. By the time I finished messing with all the field-pucks, I figure I made about $5/hr on this job ... especially once you figure in the aspirin. What gets my goat is that I was such a poor judge of character. Glen

Sterling chip Camden
Sterling chip Camden

... then they've already got one of those running their accounts payable.

Sterling chip Camden
Sterling chip Camden

Yes, if you have consequences like those to impose it works wonders. Presuming, of course, that they'll need your services in the future.

apotheon
apotheon

I'm an economic individualist (speaking of Smith)!

JohnMcGrew
JohnMcGrew

You're becoming dangerously close to being identified as profit-seeking capitalists. That's not in vogue these days. Been hearing more and more advertisements by companies stating that they were more interested in providing "value" for customers than making "profit". I'm feeling more and more like I'm living through Atlas Shrugged.

apotheon
apotheon

I haven't read Beyond Good and Evil, but I thought what you said sounded a bit like it might have been inspired by something like Adam Smith's Wealth of Nations.

Sterling chip Camden
Sterling chip Camden

... Nietzsche, as a specialization of the central theme of his Beyond Good and Evil.

santeewelding
santeewelding

Thanks, Chip, and I agree with Apotheon. Just had a conversation about this, mentioning this thread, re dealings with a corporation on the phone a few minutes ago, re, no tickee, no laundry.

apotheon
apotheon

Sterling -- I think that's the best piece of consulting advice I've ever read/heard.

Sterling chip Camden
Sterling chip Camden

that we don't deserve better than we receive. Disabusing ourselves of that notion is the first step to success. Not to fall into the trap of believing the converse (that we deserve better), but rather to get beyond the whole concept of "deserving" to embrace instead that which mutually benefits ourselves and our clients.

JohnMcGrew
JohnMcGrew

...I might put up with it more. But one of the lessons it took me the longest to learn in this business is that people who do not pay or do not consider you enough of a priority to pay over others are not worth the trouble in the long run. Better to put that energy to clients and projects that do pay.

Sterling chip Camden
Sterling chip Camden

If you have enough other business to keep you busy, then why waste time trying to rehabilitate a client that gives you grief over receivables? OTOH, if you really need the business then it may be worth the extra effort.

PMPsicle
PMPsicle

There are many reasons that a client won't pay ... some of them may make you far more money than you lose. For example a client that is temporarily experiencing the recession but will bounce back eventually ... making it easier for them to pay may result in them being so obligated that they can't leave you after the recession is over. And they may also bring you new and more profitable clients. The trick (and it's hard!) is to identify those who will be a problem for ever (lose them) and those who are experiencing a problem. Charity blesses both the giver and receiver ... and there's a sucker born every minute. The key is to be the first not the second. Glen Ford, PMP http://www.trainingnow.ca

Sterling chip Camden
Sterling chip Camden

They'll often tell the collectee that they can do things to them that are clearly illegal. Whether your client buckles under the intimidation or not, they will no longer want to be associated with you in any way.

Sterling chip Camden
Sterling chip Camden

I can't say, because in 18 years of consulting I've never needed to release the hounds. But I think their hourly is higher than mine -- and I might be easy, but I ain't cheap.

seanferd
seanferd

Much better than trying to put a lien on a customer's property for non-payment. If IT-types can even do such a thing. Cheers!

Sterling chip Camden
Sterling chip Camden

Jlvazquez825 also asked about how to obtain pre-payment. I use PayPal for some clients, and the turn-around can be nearly instantaneous -- that is, I know that PayPal has received the funds as soon as the client authorizes the transaction. It usually takes a couple of days to move them into my bank account from there.

JohnMcGrew
JohnMcGrew

If a client was dumb enough to take this to court, I doubt that they'd get anything to justify the expense.

techrepublic
techrepublic

I think the key point here would be the part: "This is especially true as it is normally not disclosed up front." I'm not a lawyer either, but it seems to make sense that if the time limit is undisclosed, it may be a problem, so I think, if doing programming for a client you think you may have trouble with, use a time limit and let them know. It can't be illegal if they are informed up front. Obviously, if you tell someone you're doing the work with a time bomb in it, you know where they'll tell you to go. Just be more friendly about it. Tell them you do your programming with a safety feature for the occasional non-payer that limits how long it works, but the safety feature is removed upon final payment. If they tell you where to go after that, you probably don't want to work for them anyway.

PMPsicle
PMPsicle

I've done a search on software bombs and read some of the legal quotes. The consensus seems to be that it constitutes fraud. This is especially true as it is normally not disclosed up front. Remember I'm not a lawyer.... nor do I play one on TV or off....

JohnMcGrew
JohnMcGrew

I've never felt the need to do this, as most projects I do will require some support at some point in the future, and it's really not in the best self-interest of the clients to poison the source. Seems to me that if they have not yet paid for the software, they don't own it yet. What is the basis in law to say that this is illegal?

Sterling chip Camden
Sterling chip Camden

... even though almost everything I produce is in code. But since my clients are software developers, they get the source code. So they could remove the time bomb themselves. Besides, what they often get from my code is learning new ways of doing things, which like your "recommendations and guidance" are hard to prevent them from using.