Unfortunately, small businesses often find themselves in a quandary. In today's ultracompetitive business environment, it is difficult to turn away customers-even those with a bad payment history. On the other hand, businesses that have had the maddening experience of dealing with "slow pay" and "no pay" customers frequently curse the day they took on the business.
The dilemma is real. While there are no 100 percent solutions, a few simple rules can greatly enhance your prospects of getting paid and avoiding collection litigation-even with new customers who have untested credit histories.
1. Establish payment ground rules up front. Set the ground rules for payment at the outset of the business relationship, and make it clear that you expect timely payment. One client of mine, a family-owned printing broker, sets service and payment ground rules through a "letter agreement" sent to each new account. The letter agreement is written in plain English on my client's letterhead and, in a friendly and non-intimidating way, achieves many of the objectives served by a more formal contract. The agreement is then signed and returned by the new account. My client has found that the signed letter agreement has more impact than printed payment terms on an invoice. In addition, he gets "double duty" from the letter agreement by using it as a sales tool-thanking the new customer for his or her business and promoting his other services. If needed in litigation, the letter agreement can serve as the basis of a contract claim against the new account.
2. Consider getting a retainer. If you are in a consulting or service business, one effective way to establish your expectation of payment is to get a small retainer up front. One of my sole-proprietor consulting clients, who has few problems collecting his fees, sets his retainer with new accounts at approximately one-half of what he anticipates his invoice will be for the first month's work. His purpose in setting the retainer is not so much to cover the amount of the first month's work as it is to establish, at the outset, that work will not be done for free. While some prospective accounts have "walked" on my client after being told of the retainer, his reaction is generally one of relief rather than regret. Any new account that won't pay a small, up-front retainer for superior service is likely to be a no-pay or a slow-pay account later on.
3. Keep on top of your receivables. It is remarkable how many small businesses let their receivables run out three months or more. This kind of permissive payment policy is an invitation to continue late payment. Especially with new accounts, it is important to track the timeliness of payment during the first few months of the relationship. When the receivable remains unpaid for 45 to 60 days, send out a personalized reminder to the client. The personalized reminder has more of an impact on the client, who will know you are paying personal attention to the account. These "personalized" reminders can be easily set up and generated on your businesses word processor.
These preventive measures take time-without question. But any small businessperson who has had the experience of dragging through court to obtain a judgment and then collect it will tell you it is time well spent. When it comes to collections, the truism holds: An ounce of prevention is worth a pound of cure.
Jason Dolin is an attorney practicing in the areas of business and commercial law in Columbus. He is also an adjunct professor at Capital University Law School.