Avoid taking on such clients, and establish penalties if they slip through your net.
Delinquent clients are like an acid drip: They eat away at your profit margin and corrode your cash flow. And once a client moves from late-paying to delinquent, it’s usually too late to expect a quick and happy ending.
Just as in sports (and war), “the best defense is a good offense.” Avoid taking on delinquent clients in the first place. Here’s how:
Step One: Choose your target market wisely. You can’t be all things to all people. Choose a target market that makes sense, given your expertise and capacity, and start there. Once you’ve established a strong foothold, then consider going beyond.
Companies that take whatever walks through the door routinely find that those clients:
1. Don’t appreciate their work, and
2. Can’t or won’t pay full price for what they received.
Plus, you may spend inordinate (and unprofitable) amounts of time trying to service them.
Step Two: “Profile” your potential clients. A client that fits your target market won’t necessarily fit your ideal client’s profile, which should include more detailed pre-screening criteria for clients. For example, after I got burned too often by business clients (my target market), I established a new policy: I get money upfront. Anyone who balks doesn’t fit my profile.
I found that companies that wouldn’t pay me upfront usually wouldn’t pay me on the back end, either. Since I established this policy, my delinquency rates have dropped to virtually nil. That’s made my other clients happy, too–I have more time to devote to them, instead of chasing down receivables.
Step Three: Make your payment terms clear. Yes, get it in writing. Your client will have a harder time wiggling out of paying if you put your terms in black and white. Nothing smells more like easy prey to a deft deadbeat than an entrepreneur who waffles about her charges. It’s also a sign that she may be a pushover when it comes to handling collections. Don’t let that be you.
Speaking of collections, you will save substantial time and money proving your case if you base it on a written contract and not on a “he said/she said” handshake.
Step Four: Take hostages. It’s hard to put the “squeeze” on a client once you’ve done the work, rendered the service or delivered the product. So hold back until you follow through on the consequences. It may sound unsavory, but in many industries, “hostage-taking” is perfectly acceptable, as long as the client knows in advance–another good reason for the written contract.
The principle works like this: “When you pay me in full, I’ll turn over _______ [whatever it is you provide].” No payment, no product. That’s why emergency plumbers can mint money: They have what you need at the moment you really, really need it, and they’re not leaving until you pay them. Once you hand over your product, you lose leverage. You are no longer essential because you no longer have something the client needs. If you’re not essential, the urgency to pay you drops.
Step Five: Add a one-two punch. If you can’t add urgency to the pressure to pay you, you can add pain. No, not “cement shoes” or broken kneecaps like something out of The Sopranos–legal pain using late fees, interest charges or attorneys’ fees that you can easily add to your client contract (do you sense the theme here?).
Let your clients know that delinquency has its downside. This gives you a better chance at whole compensation–for the amount you are owed, the lost-time value of the money and the costs of collection. And if you don’t have these terms in writing, many courts won’t grant them to you.
Follow these five steps, and you’ll be well on your way to disposing of delinquents and deadbeats.