Being owed money is part of being in business. When someone owes you money there are usually two explanations, either they can’t pay their bill or they won’t pay their bill. There are also two common reactions. The first – either wanting to get as much money as possible as quickly as possible. The second – wanting to get the full amount owed no matter how long it takes. Depending on the situation, either reaction can be problematic.
Defining the Problem
Your first step is to get a thorough understanding of why the company isn’t paying. Does the company believe that they do not owe you money either because of the quality or timing of the work? Is there a staffing or communication problem? Is the company in a financial crisis? If an invoice is unpaid, especially from a formerly reliable client, you need to call and get an explanation. When an invoice is a day or two late, send a reminder email and follow up with a phone call a week later. When you allow people to pay late, it makes it more difficult to detect a problem when there is one. If there is a financial issue, it’s likely that your main contact in Accounts Payable, and they may not be able or willing to share the full scope of the issue. When this happens, speak with an executive or owner. Someone qualified and able to share details. Hopefully, before you began doing business with the company, you had them fill out a credit application that included contact information for executives. Credit applications and contracts are a normal part of onboarding new clients.
When They Don’t Want to Pay
It probably won’t shock you to learn that people often try to get out paying bills that they know they owe. Sometimes, there is an honest dispute about the terms of an agreement, but frequently, companies try and avoid paying bills, negotiate for a discount or put off paying bills as long as possible. Regardless of the issue, the sooner you identify it and proactively address the matter, the more money you are going to collect. One way to increase your leverage is to make sure that your contract terms on services, on payment terms and consequences of default are clear. Your service guaranty should be clear that it applies to what you provide, but should indicate that it does not guaranty results. We hear customers complaining all the time that the services did not increase in new leads, customers or revenue.
No More Service, Please
If a company decides they don’t want your service anymore, it is quite common that they refuse to pay as a way to negotiate for a discount. In these cases, the sooner you take action, the stronger your position. Since collection agencies typically work on contingency rates of 10 percent to 20 percent, offering that discount for payment within ten days frequently makes sense. Be sure it is clear that the discount is valid only if you receive immediate payment. If that doesn’t work, quickly turning the case over to a collection agency will save you time and will probably result in you receiving more of the amount owed. Collection agencies have lots of additional leverage points, including the possibility of using a contingency attorney to sue. This creates pressure for your customer to pay in full. If you delay, your customer will feel that further delay is in their best interest and it becomes harder to collect higher amounts.
If the company wants to pay you but is about to close or go bankrupt, making a deal to accept less money may be your best choice for getting anything. If you decide to go this route, you will want to act quickly. Again, make sure any offer of a discount indicates it is valid only if paid within a short time frame. Once a company goes into bankruptcy, the likelihood of getting anything drops to under 10 percent and it could be a couple of years before there is any distribution. If there eventually is a distribution, most of the time it is far less than 50 percent of what was originally owed.
If the company is experiencing a temporary cash flow problem and you believe they are likely to turn it around, then you may want to negotiate a payment plan that includes fees or interest. It is important to get monthly payments instead of giving them a long grace period to be followed by payment in full. The agreement should be in writing and indicate that if they default on a payment, the entire amount plus interest is immediately due. It should also say they are liable for collection and attorney fees if you have to go that route.
Don’t Become a Lender
If the credit risk seems high, ask them if there is a discounted amount that would incentivize them to pay immediately. Don’t make the offer (once you do, savvy negotiators know that number is always possible), ask and tell them you can bring it to management for evaluation. If they make a compelling proposal, consider taking that instead of incurring the credit risk of a payment plan. As common as it is, being owed money is still frustrating. Having others owe you money can upset your plans and affect your ability to do business. Deciding when, how, or whether to make a deal for owed money is complicated. If your company doesn’t have someone with the time or professional experience to properly evaluate and negotiate in these situations, don’t turn this over to your regular attorney who charges you hourly. This makes your financial loss bigger, and they usually aren’t experienced in collections. Sending a demand letter with all the legal reasons why the money is owed typically doesn’t work.
Time to Problem Solve
A better alternative is to hire a quality collection agency that specializes in business collections. They work on a contingency basis, so you only pay if you get money, and this motivates them to bring in the highest amount possible as quickly as possible. If the agency can’t collect, they should have a network of attorneys who will take the case on a contingency basis which usually will be preferable to paying an attorney hourly with no guaranty of collecting.