What to do about the customer who won’t pay
Updated: Dec 7, 2020
I just read an article posted by a director of community relations for a receivables management company. In that blog, provocatively titled “How to Deal With Deadbeat Customers,” the author offers bulleted advice to 1) factor the invoice (sell the invoice at a discount), 2) file a lien (common practice in construction trades), 3) call a lawyer to write a scary collection letter (hint – think through the cost-benefit part of that equation first!), 4) hire a collection agency, and/or 5) write it off. Debts older than six months, the author asserts, are usually uncollectable.
Admittedly, those are all interesting options, but my advice is tempered by the desire to actually keep said customer, if possible. Not once did the writer suggest talking to the customer. She did not even qualify her advice by saying “after all efforts to collect from the customer have failed” but instead says that there are always going to be “some customers that won’t pay on time” and that these are the five ways to deal with “late-paying customers.”
If you want an incredibly high collection rate, do not write off debt as a fifth, sixth, or even seventh option. True, many companies experience cash-flow issues of their own because of late or write-off receivables from customers. True, you can’t afford to play the role of bank lender or credit agency and, at the same time, maintain the financial health of your own company.
But it does help to understand cash-flow valleys and peaks, and to approve a limited dollar amount to be “staged” for ongoing payments from repeat customers who demonstrate the ability to pay the balance on a schedule that meets your approval.
It’s a balancing act to treat customers the way we appreciate being treated. An overall collection strategy ideally offers clear and respectful communication between both parties.
One process might be to:
1) clearly state on every contract when payment is due;
2) for invoices between 30 and 45 days late, connect directly with a top company executive (versus the bookkeeper) at least every week with the expectation of collecting the balance or establishing a date-specific payment schedule for the remaining balance. If you still do not have an acceptable payment plan in place after an invoice is 45 days past due,
3) call the owner or top manager to suspend future goods or services and establish very clearly that your next collections step will be to
4) take the debt to small claims court and, as a more serious option at 90 days, if other measures have failed, let it be known that you are prepared to
5) hire an attorney or use a collection agency.
Also, don’t list “write off” as a pre-approved option for internal business staff. It should take CEO or, in a larger company, CFO approval to write off any debt. And why would you write off debt if someone is still in business, taking money from customers, and paying for supplies from other vendors?
Cash flow is a very hard animal to tame if you have unreliable payment sources. If you are experiencing cash-flow problems of your own due to slow collections, and bank credit isn’t an option, consider approaching your more financially stable customers to offer a discount for prepayment or partial payment of goods and services, based on your final profit margins, to get you to your next hilltop. Would you rather pay a finance charge or offer a cash discount? Certainly you’d rather be paid and pay your bills than be on the debit side of the AR/AP equation alongside your late-pay client.
One other point: are you having more than your share of bad debt? If that seems to be the case, it might be time to look inside your own company to be sure that salespeople are not overpromising or customer service/fulfillment isn't under delivering. Businesses will pay for what they truly need at the expense of what they don't.
And here’s my advice to business bloggers who lack real-world business management experience: Think through the repercussions of your advice. In this specific instance, remember how much money it costs to acquire a new customer to replace the one that a writer suggested handing off as a first response for late payment. It’s no way to establish the kind of relationship you may one day need with your own vendors.