Let me ask an honest question. How long do you typically wait for customers to pay you? Do your late payments last 5 days? 10 days? 15 days?
Now let me ask the same question a different way. How long do you think the average small business waits to get paid? The answer may shock you (it did me, anyway).
Hold your breath… The average small business waits 21 days to get paid. Woah. You know best that having to wait that long, sometimes even longer, on more than one unpaid invoice can put you in the hole pretty quickly.
Here’s an even more shocking statistic: After all that waiting, the average small business has amassed around $84,000 in unpaid invoices. (I’ve got worse news for small businesses in the construction industry. They may be waiting on more than $110,000 in unpaid invoices for projects they’ve already completed.)
When you go unpaid, your ability to run a successful small business diminishes dramatically. You spend too much time chasing late payments, and you lose the ability to reinvest in your business’s growth.
It’s unrealistic to think you can avoid late payments completely. Even the biggest of brands suffer from past-due invoices.
Luckily, there are proactive steps you can take to protect your business from late and unpaid invoices.
First things first: Have a lawyer on call.
There are lawyers who specialize in both small business and contract law (including breach of contract cases like what you may be facing). We recommend finding one of these types of lawyers long before you put yourself in the position where past-due invoices are stacking up.
Lawyers can help with:
- Incorporating your business or creating a legal business partnership between you and another person
- Creating and protecting your brand (respecting trademark laws)
- Applying for licenses and permits you need to operate in your local area
- Hiring fairly (avoiding discrimination and complying with federal, state and local employment laws)
- Building contracts for use with your customers
While the others are important, that last bullet is most critical in protecting your ability to get paid when the time comes. More on that in a sec.
Ask whichever lawyer you choose how much they cost to be on retainer. Most lawyers have a standard, regular fee they charge clients to perform as-needed legal services whenever they need.
The benefit to having a lawyer on retainer is they’ll be familiar with your business should any issues arise. Better yet, if you use this same lawyer to build your contracts, it will equip them to defend and enforce your contracts should you need to in the future.
Put contracts in place for your most important jobs.
Contracts protect both you and your customers. How? They make it clear (and more importantly, legally binding) exactly what goods or services will be exchanged, and in what time frame.
Successful business contracts:
- Are very, very detailed and specific
- Include strict, clear deadlines for payment
- Note late fees, attorney’s fees in the case of a contract breach, and other potential ramifications
- Have legal clauses that a lawyer writes, approves, and updates regularly
- Are agreed to (typically by way of signatures) by both the business and the client
Pro tip: Though it can be tempting, avoid copying and pasting legalese you find online into your contracts and calling it a day. Though there’s some good, free help out there, what you find could be out of date or worse, irrelevant to the laws in your state.
Nervous to present your clients with a lengthy contract? Don’t be.
Remember, contracts are in place to protect both you and your customers. Most consumers will be relieved you’re putting exactly what you intend to deliver, and by when, in writing (as long as you hold up your end of the bargain, of course).
Run credit checks.
If the price tags for what you sell are steep, it may make sense to run credit checks for new customers or clients you haven’t done business with in a while. Even if they don’t intend to pay by credit card, this will help you (as much as possible) mitigate the risk they’ll be unable to pay you.
A few options for checking an individual’s credit:
Pro tip: If you decide to start checking credit scores, avoid conducting unfair credit practices. Learn about the Fair Credit Reporting Act, and ensure you’re on the up and up. Otherwise, you put your business at risk for discrimination claims or worse, legal action.
Start requiring deposits.
Small businesses that earn the majority of their revenue from appointments know this tip well. Require deposits for certain transactions, and ensure you’re able to put at least a little money in the bank.
For example, high-end salons and personal trainers often require a deposit of some sort to hold an appointment slot. That’s because they know when customers pay any amount of money for a service they haven’t yet received, they’re more likely to show up for that appointment. It’s an incredibly successful tactic for reducing no shows.
Even if you don’t run your business on an appointment basis, collecting partial payment upfront will protect you, at least a little. When you require a deposit from someone at the time of booking or before you finish a job, they’re more likely to hold up their end of the bargain when it comes time to pay in full. Consider it your own creative insurance policy (not to be used in place of an actual insurance policy).
Consider small-claims court for late payments.
That lawyer you have on call? You’ll need this individual to help you decide when it’s time to pursue legal action.
Whether or not you choose to take a payment dispute to court typically depends on a couple things:
- The amount of past-due money you’re chasing (and if it’s worth fighting for in court)
- The customer’s ability to pay that amount
A common rule of thumb is that if the amount exceeds $2,000, the benefits of taking your case to small-claims court, for example, may outweigh the risks (a decision your lawyer will need to confirm on a case-by-case basis). Keep in mind each state has a maximum dollar limit for their small-claims court, ranging anywhere from $2,500 in Kentucky and Rhode Island to $25,000 in states like Tennessee.
Depending on the size of the unpaid invoice, the legal system has a number of options at your disposal for going after what you’re owed. There’s arbitration, small-claims court and even litigation if you’re willing to wait a little longer to get your money.
Don’t blast anyone on social media.
I know what you’re thinking. Contracts, credit checks and lawyers cost money. And social media is free (well, some of it)!
After all, annoyed customers use social sites to put your business on blast when they feel you’ve wronged them. Why can’t you use social media to do the same?
Resist the urge to lash out on social media regarding late payments in an attempt to force clients to pay you sooner.
Acting out on social media can have a substantial negative impact to your online reputation. The best things you can do online are to keep the information about your business consistent, and respond to consumers often and politely. Anything different will cost you more than any unpaid invoice ever could.
