Watch Out For Deadbeats

Not all customers are good customers. This is the costly gotcha that too many startup entrepreneurs are learning during this recession. Eager to attract and please any new customer, business owners can end up attracting customers who have no intention of every paying the bill.

I like getting paid. It's the best reward for work well done and vital to remaining in business. From my perspective a job is only really done when you collect a check, that doesn't bounce.

There are two types of customers you don't want to serve as a startup business owner -- the chronic slow-payer and the no-payer. It's foolish to think that all customers will pay your bill on time if at all. The longer you have to wait to collect payments, the more money and time you lose in the chase.

There are many implications of serving slow-payers and non-payers. Slow collections say something about how well you run your business to potential financing partners. If you want a bank loan, expect lenders to look closely at how quickly you collect outstanding "receivables" from customers. You'll find that business owners who collect customer payments within 30 days of invoice will get more credit at lower rates than business owners who don't pay attention to collection details.

Another cost of non-payment is the loss of the startup entrepreneur's confidence. There is a certain kind of angst business owners suffer when they know they have been snookered by a deadbeat customer.

As a startup entrepreneur, the best time to take command of collections is before you lose any money to deadbeats. Here's how to do it.

  1. Establish minimum down-payment policies. Simply stated, if your customers can't afford a down payment, then they can't afford the entire job. Ask for them. If prospective customers complain about a down payment, then simply invite them to call you when their financial position improves. Skilled deadbeats may whine about "how down payment policies are inconvenient for them," but think about how getting no payment will be inconvenient for you! If you offer services to unproven first customers, be sure that the requested down payment amount covers all anticipated initial out-of-pocket costs. In some service businesses, such as painting or construction, you can minimize non-payment risks by asking customers to purchase materials and supplies directly.
  2. Set short billing cycles. The faster you send out bills, the faster you can receive payment. Service companies should consider sending out new invoices once a week, rather than once a month. Product-oriented companies should automate billing to the date of product shipment. I like it best when service providers collect final payments before they leave a job location, especially if it is in a home.
  3. Know the rules of small-claims court. Before you determine how much credit you will provide to your target customers, visit your local small-claims court's Web site. Small-claims court collections are fast, easy and lower in cost than attorneys or collection agents. In addition to learning what documentation you'll need to file an action, pay attention to your county's minimum and maximum dollar amount requires to rule on claims. Ideally, you never want to offer first-time customers credit that exceeds the small-claims limit in your county. So if you bid a job for $7,500 and your local small claims court only takes cases up to $5,000, then make sure you get a $2,500 down payment.
  4. Determine billing contact information. When entering into new business relationships with other businesses, find out the key billing information before starting work. Collect the names, addresses, email addresses and phone numbers of the company's accounts payable department. Whenever possible, email bills to save time.
  5. Establish payment due dates. I make a point of buying from U.S. small businesses. It always amazes me how often I receive invoices from freelance entrepreneurs and other new companies with no detailed payment due date. If you don't list the date a bill is due, how will a small claims court judge be able to rule in your favor? Better service contracts and invoices stipulate exactly when bills are due and past due, to clarify when late charges can start to accrue.
  6. Get it in writing. For service-oriented businesses of any kind, no work should begin without a signed service agreement. A final service agreement is different than a work proposal. Service agreements should be signed by both parties. They should include a detailed description of the proposed work project, billing rates, payment rules, and how disputes will be resolved. If you have to go to court or arbitration to collect payment, assume that the service agreement will be "Exhibit A."
  7. Keep excellent customer records. In general, judges will look for the following documents to rule in your favor: a signed service agreement and proof of work completion (before and after photos, copies of work product, copies of shipping information, etc.). Judges then will look for specific details of billing and payment obligations. One sneaky way slow-payers and no-payers purposely delay payment is to ask for service changes while a job is in progress. However, these unwritten requests can blur obligations and void written contracts. Your best practice is to amend existing written service agreement to reflect change order requests. This also gives you the opportunity to adjust your fee for the proposed work additions.
  8. Penalize nonpayment. All service agreements should include language that you can charge interest at some unspecified rate on unpaid balances. Otherwise there really isn't any cost to your customer for non payment. (You can always agree with the customer later not to charge interest on an outstanding bill, but don't give away this right upfront). In addition, all service agreements should include language in which the customer agrees to pay all costs associated with bill collection, including reasonable attorneys' fees.

Susan Schreter is a 20-year veteran of the venture finance community, MBA-level educator and policy advocate for small business owners. Her work is dedicated to improving startup operating performance with reduced personal risk to entrepreneurs. She is the founder of www.takecommand.org, which offers the largest centralized database of regional and national small business funding sources in the U.S., including angel clubs, micro-finance lenders, venture capital funds and more. Follow Susan on Twitter @TakeCommand

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