Business Management – Dealing with clients who don’t want to pay

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This is another installment of my Business Management posts, geared towards those of us who are business owners and/or consultants.

Clients who don’t want to pay are every business owner’s nightmare. It doesn’t really matter what industry you’re in. In our IT world, this can mean one of three things. One, your client doesn’t want to pay for the hours you’ve spent on them (whether it be for support, new deployments, consulting, etc). Two, your client doesn’t want to pay for the equipment you’ve sold them. Or three, a combination of one and two. This can seriously impact your business and cash flow, and you need to understand how to handle it in a quick and efficient manner.

Thankfully, the majority of my clients aren’t in the above category. I have however had a few that were. Dealing with this type of situation can be very frustrating and stressful. You’ve gone through all the effort of marketing and branding your business, you’ve met with this prospective client, they’ve hired you on, you’ve agreed to whatever services or products, and now they’re balking at the bill. Here are a few ways you can help protect yourself.

First of all, whenever you sell equipment, make sure you have a signed and formalized agreement in place. Part of my agreement is as follows:

ix)  DEFAULT BY BUYER

Any of the following events shall constitute defaults on the part of Buyer hereunder:

(a)  failure of Buyer to pay any payment within thirty (30) days in which same becomes due;
(b)  any breach or failure of Buyer to perform any of its obligations under this agreement;
(c)  insolvency of bankruptcy of Buyer or assignment for the benefit of creditors;
(d)  any other act of Buyer which will causes Seller to deem itself insecure.

Upon the occurrence of any default Seller may exercise this option without notice to or demand on the Buyer and thereupon all equipment and rights of Buyer therein shall be surrendered unto Seller; upon default, Seller may take possession of the equipment where found with or without process of law in court, may enter upon the agreed premises without liability for suit, action, or other proceedings by Buyer and remove same; hold, sell, agreement or otherwise dispose of the equipment or keeping of any of them as Seller so chooses without effecting the obligation of Buyers as providing by this agreement; collect all unpaid  payments due without prejudice to Seller’s right to regain possession of the equipment.

On one occasion, I actually had to ‘repo’ the hardware from a client. Yes, you read that correctly. I actually had to go in, physically pick up my server, take it out to my car and bring it back to my shop. Notice how I referred to that server as “my server”. This is important to remember. This is YOUR hardware that YOU own until the client pays the invoice for it. Now this can get into some grey area depending on your local laws and ordinances, so make sure you check into how your area regulates ‘repos’.

When it comes to bigger projects, it might make sense for you to ask for a deposit up front. This will entirely depend on what you’re selling and what it’s worth. The health of your business and cash flow will also factor into this decision. For example, if you’re selling a laptop worth $899.00, and your business is generating a million dollars a year in revenue and you’ve got $200,000.00 in the bank in liquid assets, then you probably don’t need to ask for a deposit if you’re comfortable in expecting the invoice will be paid. If you’re selling an entire enterprise network for $15,000.00 and your business is only 8 months old with $18,000.00 in the bank, you’ll probably be more inclined to ask for a deposit. It’s all about scale and potential risk. As well, you don’t want to give off the impression that you’re ‘too small’ to handle a bigger job. In other words, you don’t want someone thinking you’re asking for a deposit because you don’t have the cash or terms with your suppliers to get the equipment yourself. So you need to figure out a way to ask for deposits, while ensuring confidence in your company isn’t eroded.

Moving on, we look at getting paid for your time. This one is much harder to mitigate. Because there are no physical assets here, you can’t ‘repo’ something. You could in theory un-do any work you’ve done, but again, be very careful with this and understand your local laws and legislation. You could wind up being legally liable for something like profit losses, if what you do renders a system or network inoperable and the client loses revenue because of it. All I can say here is that you should try and limit the amount of hours you put into a new client until you build a history with them. Unless you’re being hired to do some sort of overhaul or mass deployment right off the bat, keep the hours to a minimum over the first month or two and see how the client pays you. Are they paying you a week after receiving your invoice ? Exactly at NET 30 days ? 60 days ? Are you still waiting for your first payment 3 months later ? If you haven’t put out a ton of hours up front, then even if getting that payment is difficult, at least you aren’t sitting on a very large invoice.

Another option would be to request credit references. Be careful with this technique though, as in most cases, you won’t be large enough to justify the request for credit references. If your project is $5,000.00 and the company you’re doing business with is generating $15,000,000.00 a year in revenue, then your request will likely be considered insulting.

Remember, handling new clients in a professional manner will help mitigate the risk of not getting paid.

Author

Martin Lehner

Martin Lehner is an technology professional working for an IT services firm in Whitehorse, Yukon (Canada). He has been working in the technology field for over a decade. With a degree in Business Admin and numerous industry certifications, Martin leads a team of IT professionals that provide third party support for clients. Originally starting a company to offer web development services, Martin quickly realized that clients wanted the entire spectrum of technology services. When Martin is not at work (which is not often, since his company offers 24/7 support), he is busy at home spending time with his family.

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