There are few situations more frustrating for a small business owner than a customer who refuses to pay on time. But, as tempting as it might be to confront your client and exchange some harsh words with them, this type of behavior will only make matters worse. So, what is the most appropriate way to handle a problem like this? In episode #150, Gene Marks and Elizabeth Larkin offer a professional yet direct approach for dealing with customers who owe you money.
1:46—Today’s Topic: How Do You Deal With A Client Who Won’t Pay You?
4:10—First, find out whether your client has an acceptable reason for not paying you on time.
5:42—Consider your future relationship with this client before you pursue legal action. If you want to have a long term professional relationship with them, it may be better to give them some extra time.
7:06—When you can’t resolve this issue on your own, reach out to a collection attorney who can pursue this customer on your behalf. However, keep in mind that the attorney might keep a percentage of what the client owes as part of their fee.
10:30—According to Gene, now is the perfect time for older entrepreneurs to sell their small businesses due to current economic factors.
Submit Your Question
Elizabeth: Welcome back to the Small Biz Ahead podcast. Today, we have a new question from an old questioner. This is Lorie from Easthampton, Massachusetts, wrote in two questions. So we answered her first question last week, and we’re gonna answer her second question-
Gene: This is the one that’s gloating over the Patriots’ win, right?
Elizabeth: No, no.
Gene: This is the one that’s the … right?
Elizabeth: That was you.
Gene: She’s the one that’s arrogantly walking around with all these world championships.
Elizabeth: Just ’cause she’s from Massachusetts.
Gene: Yeah, just because she’s from … and she thinks she can just … not just one, but listen, I’m Lorie from Massachusetts. I’m gonna ask two questions, right? Because I’m a champion-
Elizabeth: This is a good question.
Gene: And I deserve an extra question. That’s what she’s thinking.
Gene: All you guys in Philly, you have nothing. You have one Super Bowl championship.
Elizabeth: You just won the Super Bowl last year.
Gene: Yeah, so what? It was one in 80 years or whatever. So, people from Philadelphia can only ask one question. Lorie can ask two, with all of her- [crosstalk].
Elizabeth: People from Massachusetts can ask two. That’s true.
Gene: Fine, fine. Fine.
Elizabeth: Okay. After we hear from our sponsor and Gene is done ranting, we will be back with Lorie’s second question, which is about customers that don’t pay.
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QUESTION: What should you do when customers don’t pay?
We’re back. This is Lorie from East Hamptons’ question, and as a reminder, she owns a machine shock, and here’s her question.
“We have a customer that owes $3100 and is not responding to my emails. The account is more than eight months overdue. What is the most cost-effective way to collect this money? There is a possibility that we might want to do business with this person in the future, so I don’t want to sever the relationship completely, but on the other hand, do I really want to keep a bad customer?”
This is a great question, ’cause I feel like this is something you’ve dealt with before, probably a lot of business owners have dealt with this.
Gene: The most cost-effective way, ’cause I’ve done some research. You can buy a baseball bat for seven to eight bucks. And you’ll want to get an aluminum one that’s got a lot of heft to it, right? And then … right? You can figure out what to do from there. Because that is what you feel like doing, isn’t it? This customer has not paid Lorie eight months now.
Gene: That’s a lot of money.
Gene: And they haven’t paid for eight months. I would be out of my skull if that was the case.
Gene: By the way-
Elizabeth: She actually seems pretty calm about it.
Gene: She does, I would have a lot of profanity in this message. There’s nothing worse when you run a business, ’cause it happens to me, you do the work and these people aren’t paying, and it’s just-
Elizabeth: Does this still happen to you?
Gene: Yeah, it does. I’ve become a lot smarter about it. This podcast is helping me get a lot smarter about it-
Gene: Look, we can talk about how to prevent it, we can talk about outsourcing the collection and all that, but the bottom line is this: she’s in this situation.
Gene: So, right now you’re listening to this podcast, somebody owes you money. Whether it’s $100 or 3 grand, it doesn’t make a difference. It’s your money, and they haven’t paid you in eight months. And when she says, “On the other hand, I may want to do business with this person in the future,” at first you’re like, “Oh my God Lorie, how could you … whatever?”
Gene: Meanwhile, as a business owner I’m like, “I totally get it.”
Gene: I’d do business with the devil if he paid me enough money. We’re all in business, trying to make a living and a livelihood and all that, legally. So I get it when she says …
Gene: It’s incredible how forgiving we can be.
Gene: When somebody owes you money. So having said that, Lorie, first of all … you didn’t say … I’d like to know … the crucial question is, why are they not paying? I’d like to find that out. Usually … are they jus completely blowing you off? Are they bankrupt? Are they having a cash flow problem? Is the owner of the business sick or going through a thing? I realize it’s been eight months, but based on the explanation, could it potentially just be a temporary thing?
Elizabeth: Could they have forgotten?
Gene: Who knows? Could they have moved? I’d like to know why they haven’t paid. That’s number one.
Elizabeth: And the thing that’s a real red flag for me is, they’re not even responding to her emails. So it’s not like they’re writing and saying, “Oh, yeah, yeah, we’ll get to it.”
Gene: I mean, that is-
Elizabeth: They’re totally blowing her off.
Gene: Yeah, that’s the absolute worst. So, they’re not responding to her emails, so my next thing is, okay. How do you call them direct, or have your accountant call them if you don’t feel … I would have a hard time calling this person direct, ’cause God only knows what would come out of my mouth. So, I would want to have somebody-
Elizabeth: You’d be re-enacting that baseball bat scene from The Godfather.
Gene: Yeah, yeah. I would want somebody with more diplomacy and professionalism than me to call-
Elizabeth: That’s true, you’re not very professional.
Gene: No. I would lose the customer forever. So, I’d want to find out the reason why, I would want to reach out and see what the story is, because that might have an impact on your decision.
Having said that, to determine whether or not it’s even worth your time going forward, and I do this all the time. You do have to look at the long-term value of this customer. I mean, if you’re saying you’d like to do business with them in the future because you think there might be a shot of them generating $50,000 of business with you, then maybe the $3000 is worth taking a hit on or something. If you really think there’s a good shot at $50,000, if you think it’s out there.
I think about this all the time. I’m like, “This customer, I’m gonna kill ’em, but there’s potentially a lot more work that’s out there.” Meanwhile, if I look at the same customer, I’m like, “I might never see another dime from these people. Or if I see anything it might be another grand or whatever.” That’s when I’m like, “I’m out.”
Elizabeth: You just write it off.
Gene: Yeah. So, just write it off. You know what I also do? Sometimes I have the urge to call them up and have a fight with them. Do you know what I mean? Just to feel better emotionally. There’s never, ever a happy ending to that scenario. And you don’t even feel good [inaudible].
Gene: You don’t even feel good. You look back on it years later and you’re like, “Oh, my God, I was such an idiot. Whatever.”
Elizabeth: You don’t feel better?
Gene: You just move on. You don’t feel better. Very, very short term type of thing. So-
Elizabeth: Would you ever turn this over to a collections agency?
Gene: So, let’s talk about collection attorneys, okay? The answer is yes, I absolutely … again, when somebody’s getting a letter from a collection agency, it pretty much means you’re never gonna do business with them again.
Gene: So you gotta expect that.
Elizabeth: So, there’s two options here. One, she thinks she can get more business out of them again and it’s gonna be worth writing off this $3100.
Gene: Yeah, yeah.
Elizabeth: So, then what are her options at that point?
Gene: The other option is, again, you gotta find out what he nature is.
Gene: Can this be worked out? Because there’s always a story behind the story. So, if you think there’s a chance of working it out over time with a payment plan or whatever, you want to do your best efforts to do something like that, depending on what the issue is.
The third option is just to walk away, if these people are not responding to you, they’re being jerks, it’s just a loss. You don’t get into a fight-
Gene: You just walk away. The collection attorney though, that’s sort of the walk away option as well. There’s been a couple times in my life, I’ve handed things over to collection attorneys, and by the way, I’m happy to recommend some if … I don’t know if you want to put that on the show notes or not-
Elizabeth: Yeah, leave a comment in the show notes.
Gene: I’ve got a really good … yeah, long time collection from a user in Florida, of course, where else would they be located?
Elizabeth: Yeah. Well-
Gene: And their collection attorneys-
Elizabeth: There goes all our Florida [crosstalk]-
Gene: Yeah, there they go, right. But I forget what they take. They take something like 30 or 40% of the invoice, so Lorie I’m telling you now, that you’ve got a $3100 invoice, you might only see 1500 or 2000.
Elizabeth: How often to they get the money though? They always get the money, right?
Gene: They succeeded one out of two times.
Gene: See what happens, is the collection attorneys send a few threatening letters, and a lot of times that scares people. They threaten to go into their credit history, or you’ll report them and all that, and that scares people as well.
Gene: But then, the collection attorney … it depends on the deal that you negotiate, they may decide to go after them through court. If the receivable is big enough, the collection attorney might say, “We’ll do that as part of our fee.” If it’s not big enough like only 3000, they’ll be like, “We’re happy to go after them, but we’re gonna need you to reimburse us for court fees.”
Gene: And then you might be like, “It’s not worth it.”
Elizabeth: Not worth it.
Gene: … At this time. I will say this about [inaudible], the two times that I’ve used them, and I was literally thinking of using them again recently but we got it resolved, the joy that you get being copied on the letters that they send to this person-
Elizabeth: Is worth it?
Gene: It’s really quite … it’s quite [crosstalk], it really is. It makes you feel really nice. And they sent it by certified mail, people gotta sign for it, you get it-
Elizabeth: Oh, yeah.
Gene: And you’re like, “Oh my God, this is great.” So, that … if you walk away with any benefits from that relationship, that’s what you would do.
Elizabeth: Alright, we’ll be right back with our word of brilliance.
WORD OF BRILLIANCE: Exit
Elizabeth: And we’re back with Gene’s word of brilliance.
Gene: So Elizabeth, today’s word of brilliance is exit. In 2018, according to Biz Buy Sell, B-I-Z B-U-Y
Elizabeth: Okay. We’ve mentioned them before.
Gene: Yeah. They do a quarterly analysis of business transactions. Just small businesses that are selling their businesses. 2018 was the all-time highest year of small businesses selling themselves.
Gene: Exiting out. Yup. That is correct.
Elizabeth: Wonder why.
Gene: Well, let me tell you why. It was a really good year to sell your business if you’re a small business owner. For starters, interest rates, relatively low. So when people want to buy, they can buy and finance it at a pretty good thing. The stock market being as unstable as it’s been back and forth, as much as it’s going up, has kind of freaked some people out and they said, “You know what, rather than give my money on the markets, I’d rather have more control over it, so I’ll buy a business with that.” Number three, inflation is still relatively low, which means that if you want to take your money and try and get a better return on the investment, some individuals are just not … what choices do they have?
Gene: And buying a business is a choice. And then there’s demographics. Millennial generation continues to get older, and then they get more experienced, then they want to go out and get in the world of business-
Gene: And what better way to get in the world than buy an existing business? And you’ve got an aging group of business owners. The average age of the US business owner now is about 53 years old.
Elizabeth: That’s not old.
Gene: But the group’s getting older, and people want to retire, and the whole baby boomer thing or whatever, so they’re looking to get out too. All of that, combined with a fairly strong economy where people have that sort of excess cash and confidence and all of that, for most industries … some industries, not doing as well. But for most industries, it’s turned into a year where there’s been a lot of transactions.
So, I would say to you that if you’re in an industry now that’s been going, if you’ve been profitable, if you’re getting older and looking to get out or whatever, right now the timing is good to sell your business. The issue that you have is whether or not you’re ready to sell the business, ’cause my clients that were the most successful at selling their businesses began the process a good two to three years before they actually put their business up to sale. You know what I mean? They got their documents together, they got their financials together, they upgraded their technology, they did a lot of steps which is a whole other conversation.
Gene: Which you should be doing anyway, by the way.
Gene: But they got their business in a good condition to sell, and figured out what a good price there is for it.
But having said all that, if you think your business is in a good position to sell right now, it’s a good time. More businesses are selling themselves now than ever before. So my word of brilliance is exit.
Elizabeth: What a great word of brilliance this week, Gene.
Elizabeth: I just want to remind all of our listeners that you can always submit a question and Gene will happily answer it on the podcast. You can submit the question by going to our website, smallbizahead.com, clicking on the podcast category, and then if you open up any episode in the Show Notes, we have a link where you can submit your question. And we’d love to hear from you.
So, thanks for tuning in, and we’ll talk to you next week.
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