There are few things more frustrating for a small business owner than a client who refuses to pay on time. Delayed payments not only diminish your anticipated profit margins, but they can also divert your attention from other more pressing business matters. So, what is the quickest way to resolve such a difficult situation? In episode #115, Elizabeth Larkin and Gene Marks advise small business owners on how to professionally and effectively handle a late-paying customer.
0:36—Today’s Topic: How Do I Deal with a Late-Paying Client?
1:28—Small business owners can set up a billing system that discourages late payments clients. For instance, sending out your invoices as soon as possible encourages your customers to pay in a prompt manner.
4:12—Allowing customers to use credit cards makes it easier for your business to collect payments from them.
6:21—In the event that a customer is late with a payment, make sure that your CRM system is equipped to send out follow-ups or reminders so that they don’t overlook it.
8:20—If significant time has passed and a customer still has not acknowledged the invoice, business owners need to hire a collection attorney or appoint someone within their business to pursue this customer until payment is recieved.
15:16—Gene suggests that supporting a special cause can help small businesses attract more clients. However, business owners have to be careful not to pick a cause that would offend any of their existing client base.
Submit Your Question
Elizabeth: So Gene, today we’re going to talk about a topic that you’re very serious about, and I can’t wait to hear you go on a tear. It’s about …
Gene: This is a topic … Go ahead, what’s the topic?
Elizabeth: Your Worst Nightmare: Late Paying Clients. So, let’s just give a little background for our new listeners. Gene is a small business owner, and he has a 10-person small tech company, and he has what, 600 clients?
Elizabeth: In the Philly area mostly, some all over the country. So, you’re billing out what, at least a hundred clients every month?
Gene: Yeah, I mean, any given time we have maybe a hundred, 150 invoices that are outstanding.
Elizabeth: So, after the break, we’re going to hear from Gene about how he handles late paying clients.
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QUESTION: How Do You Deal With Late Paying Clients?
Elizabeth: So, the first thing I want to talk about is, how do you set up your billing system to discourage late paying clients? Do you do anything?
Elizabeth: What do you do?
Gene: Oh, we’re talking about this now? Okay, so yeah …
Elizabeth: Yeah, we’re in the recording studio.
Gene: Okay, so guys listen. The best way to avoid having to collect money is to not have any late paying clients. So you want to take some steps to try to minimize the number of late paying clients that you have, and keep in mind, Elizabeth, this is such a near and dear question. As business owners … Every business owner shares this in common. I mean, we could be from any background, culture, religion, race …
Gene: Whatever, country. We will all one day be in our eighties and sitting in a nursing home somewhere, we won’t be able to remember what we had for breakfast, but we will always be able to remember the clients that stiffed us on payments, right? You just … it will wake any business owner out of a slumber … But, you never forget this. So, the idea is to try to avoid those people that aren’t paying you, or are late paying.
Elizabeth: So first, get on blood pressure medication.
Gene: Yeah, you take blood pressure medicine. But actually, I want to get back to that because the whole blood pressure thing is actually important, but okay. So, for starters, you want to get your invoices out quickly. That’s number one. So, whatever you’re doing when you ship, when you provide a service, you need to make sure that you’ve got a policy, a procedure for getting that invoice out right away.
Elizabeth: So, just to interrupt you for a second. And I am the host so I can interrupt you I guess.
Gene: By all means.
Elizabeth: This is why I love mobile payments, because if you have … Let’s say you own a landscaping company, and I feel like I use this example all the time, but it works for this, and one of your employees goes out and takes a tree down in someone’s yard, and they go up to the house and they’re like, “Hey, I took the tree down. Here’s your bill.”
Gene: You get the payment right there.
Elizabeth: And it’s kind of like, you’re either going to pay me, or I’m going to leave this huge tree in your yard.
Gene: Absolutely. So, you get invoices out, and ideally you get paid right away. At the same time, by getting the invoices out, depends on the terms that you have with your clients, but at the very least, when the service is performed, the product is performed, you might have a mobile application like FreshBooks, Zero, QuickBooks online, and inDinero, there’s a bunch of them, and you generate that mobile invoice, and you teach your people that are providing the services to generate the invoice so that it gets out. They can be blind copied to your account so they can double check it. And if an invoice goes out wrong then fix it. It’s not the end of the world. A lot of people are like, “Oh, I don’t want to send out a wrong invoice.” Like, you know what, 99% of them are going to be right. And then if somebody screws something up you call the customer, we screwed up the invoice, let us send you another invoice. But at least you get it out. That’s number one.
To your point, if you can collect the money, collect the money. Take credit cards. I know we’ve talked about this a hundred times in the past about taking credit cards, but take credit cards and make sure that you’re getting paid right away. It is well worth the credit card fee to get paid now rather than having to chase down money months later from some deadbeat that didn’t pay you.
For other clients, there are some customers that you worry about, and some that you don’t. And it’s always the 80/20 rule. So, when people talk about putting in procedures for collecting receivables let’s face it, 80% of your customers are good people.
Elizabeth: They’re just going to get the bill, they’re going to …
Gene: They’re going to pay. They’re going to pay on time, you know them, you’re familiar with them, so, you don’t need to worry about them. You need to worry about the 20% of customers, they are either new customers, because you really have never done business with them before so you’re not a hundred percent sure how they’re going to be. And then you’ve got the other customers that you just know are known deadbeats, or they delay payments, or whatever, and you’re still doing business with them because, let’s admit it, we’re all business owners and we’re …
Elizabeth: Ya sometimes you have to.
Gene: Trying to make a buck. It really is an 80/20 issue. So, you get the invoice fast, you get paid immediately when you can. Then you look at your customers and you want to focus on those 20% that you know are late payers. That’s just a given. For those that you know are late payers, or even those that are new customers, and by the way, hopefully you’ve done a credit check as well on those new customers. You’ve looked at Dun and Bradstreet, you’ve gotten some references …
Elizabeth: That’s not for everyone though.
Gene: Not everyone.
Elizabeth: Like, some types of businesses you’re not going to do …
Gene: You’re not. There’s an 80/20 rule for that as well, so if you have a new customer you might say, “Listen, for any new customer that we’re sending an invoice that’s more than $2,500 bucks, we’re going to do a credit check for those guys.” Okay, but if it’s less than $2,500 bucks, fine, we’ll let it slide because it’s not worth the time. So it’s an 80/20 rule when it comes to credit checks. So, do a credit check, though, on those customers that are new.
Now the invoice is out, you didn’t get paid yet, the invoice is out. Again, for the 20% of customers you do want to schedule follow ups. I like using a CRM system. A lot of accounting systems have reminders as well.
Elizabeth: Now, are you doing the follow up?
Gene: No. I’m going to talk about that in a minute as well. But, no. A follow up should be scheduled so that, again, for those 20% of customers that you’re just not sure if they’re going to pay, or pay on time, you should be emailing them a reminder. And the email should have a copy of your invoice, like re-invoicing them with the email, which you can send with the invoice, “Hey, just in case you forgot, here’s the invoice with … ” and your invoicing system, and they all have this, all the accounting systems have, “Please, click on this button and you can pay by credit card.” Like, just prompt and nudge, and prompt and nudge. This is all up to when the invoice comes due. So that’s important to do.
Now, let’s get to the part where the invoice has now gone overdue. There used to be a time back in the day when I was running my business where my accounting manager would send to me a receivables listing every week, and then I would see people that went overdue when their invoice was due and I would get nauseous. I would get angry, violent, and then I would get nauseous. And there is nothing, and any business owner knows this that provides a service or ships a product, you can’t believe, you’ve done everything you said you were going to do and the person hasn’t paid yet.
Elizabeth: And then you’re like, “Can I move into retail?”
Gene: Right. I’m literally going to kill this guy. And then on top of all of that, then there’s the customers that will partially pay an invoice because you did one little thing wrong, or one little thing is open and they’ll only pay …
Elizabeth: Oh my God. That’s almost worse.
Gene: That’s the worst, that you get partial payment. There’s all that sort of thing. And then there’s plenty of customers around that will lie to you. You know, you’ll pay? “Yes, check’s in the mail. I promise to pay you this week. It’s all good.” And then they’ll pay me … You’ll get lied to a lot as well. This is all after an invoice is due.
My advice on all that cause collections – there’s no silver bullet. It’s a matter of just pursuing it. You don’t pursue it. I learned this when I was going through bottle after bottle of Pepto Bismol, looking at these receivables. I finally turned to my Accounting Manager and I said, “You know what, I’m going to pay you a little extra per week to spend a little extra time and I want you to do it, okay. I’m not dealing with the receivables anymore.”
Elizabeth: Just for your mental health.
Gene: And literally, that’s a huge thing, Elizabeth. And I said to Susan, and then she still is my Accounting Manager, she deals with the collections.
Elizabeth: This is not personal to her.
Gene: It’s not. She could care less. And I don’t mean this in a bad way. To her it’s just a job, it’s just part of her job and she kind of finds it amusing. She actually gets a little sort of savagery out of it. She’s pursuing some of these people. She gets entertained. She used to share the stories with me, and then she knew that would make me violent. So she doesn’t even tell me the stories. I don’t even know about … The only time where I know that there’s a problem is if like, more than one invoice is overdue and another invoice is due to this client. She’ll make me aware. And then I put a red light on everything. And I’m pretty Draconian about it, so you’ll have one invoice overdue, and then we still continue to provide services, and then the second invoice is being sent out. I know they haven’t paid the first one, and she makes me aware of that. And then I tell everybody, “red light” that’s working on the project until we get paid.
Now, sometimes clients really get annoyed at that, like I’m the bad guy. So I’ve gotten calls and emails …
Gene: Don’t ask. Don’t ask. It’s my fault. It’s nobody else’s fault but my fault, right? God forbid that I’m asking to get paid on an invoice. But it’s we’re having cash flow issues, or you guys haven’t finished this kind of work yet, I mean, it’s the first time I’m hearing from this person and I didn’t realize that something we did wasn’t done. It’s 60 days after the invoice is due, and now I’m hearing about it for the first time. Do you know what I mean? Like, come on. Let me know earlier about it, then we would’ve fixed it earlier. Now I’m finding out now. So that happens, right?
Again, Susan runs interference for me on that as well. She will deal with the client and say, “Oh, I’m Gene’s Accounting Manager. Oh, I see there’s a problem, I’ll talk to Gene.” I mean she has a very good way about this with me. We’ve worked together for a long time. And we can handle problems that way. She’s learned not to get me involved, because when I get involved on an overdue invoice I lose clients. I really do. It gets ugly fast.
Elizabeth: It’s very, very personal for you.
Gene: It’s personal, and I have no time for nonsense. And I don’t suffer fools very well. So if somebody isn’t paying me, and they’re not telling me why they’re not paying me, they’re just acting like a jerk, they’re not paying me. I have very little patience for that. And some people are so much better at that than I am. They can handle … then we get to keep the client. Everybody knows when I get involved in a collection issue we’re going to lose the client. So we try to avoid me being involved. Only twice in the 24 years that I’ve been running this business have we sent money out for collection, for like a collection attorney. And once it succeeded, and once it never – he still didn’t – and we just wrote it off.
Gene: Yeah. And when it succeeded we gave 35% of it to the collection attorney, they were very good. But it only happened twice. So that’s a testament to Susan. But she doesn’t tell me. I know we have late invoices. And when I mean late, not crazy late, but more than 30 days or whatever, and she doesn’t tell me about it. And it has made such an enormously positive impact to my health by just having her run …
Elizabeth: How long have you been having her do that?
Gene: It’s literally been about 10 years since she’s been doing it. And it was literally, I mean it was literally making me physically ill. So that’s what – most people talk to me about collections. You take all the steps you can to avoid an invoice going late. You have to accept the fact that there are going to be some jerks and deadbeats out there that are just not going to pay, or monkey around with you for whatever the reason is, and I’m telling you, the best advice I can give to a business owner to deal with that is you have somebody else deal with it for you. There’s no silver bullet. Let that person … because then they’ve got to call, and they’ve got to follow up …
Elizabeth: So how would you find someone?
Gene: It’s easy. I mean, it’s a … I don’t want to make this like belittle the job, but it’s really a very low skill job. You can go and get a contractor from UpWork or Craigslist …
Elizabeth: Susan is stabbing the Gene Marks voodoo doll right now.
Gene: No. I mean, Susan’s great at what she does, but she’ll tell you. It doesn’t take that much brains to send out an email or call and just remember to call twice a week until the person is shamed into paying.
Elizabeth: What I’m saying is, what would you do? Hire a contractor who’s a bookkeeper, or can you hire a bookkeeper through a bookkeeping service and add this to their …
Gene: It does not have to be a skilled person is all I’m saying. So if you’ve got an existing bookkeeper and that person is willing to take on that extra task that’s even better, because they’re most familiar with your books and what they’re doing or whatever. But, it does not have to be a skilled person. It just has to be an organized person so that when the customer lies to that person and says that they’re going to pay their bill, that person can schedule a follow up one week later, or a few days later so that they can call the customer back up and say, “Gee, at 11:57am on May 12th, you said that you were going to pay my bill and it’s now May 18th at 2:10pm and we haven’t received your check yet.” I mean, you literally have to do that. You know what I mean? Like, can we take your credit card?
Elizabeth: You have to shame people.
Gene: You do. And it’s very unproductive, distracting work for a business owner to do, and it takes you away from what you do best. And then you know what it does, it really sours you a little bit, and you don’t want that. You want to be positive. Yeah, you want to be championing. Again, it’s the 80% of your clients are good people. They don’t act this way. And really, even the 20% that are left over don’t act this way just because they are included in the 20% are new clients, are people you just don’t know. So it’s really just a small percentage of people that are going to behave that way. Don’t let them get you down. Let somebody else deal with it.
Elizabeth: We’ll be right back with Gene’s Word of Brilliance.
WORD OF BRILLIANCE: Social
Elizabeth: And we’re back, and ready for Gene’s Word of Brilliance.
Gene: Social. I wrote about this elsewhere, although I’d like to write about it for Small Biz ahead, but I covered a survey that was done.
Gene: Oh really?
Elizabeth: I’m kidding.
Gene: Golly. You scared me. So I covered a survey that was done, Elizabeth, that was done by a big communications company, and they surveyed more than 1,100 consumers. 71% of those consumers said that they are more apt to spend more money with a business if the business supports a social cause. So they’re more apt to spend, as long as it’s a positive, or environmental cause. By the way, there’s a caveat to that. The majority of them said that they wouldn’t be spending more money if the business supported a cause that they didn’t believe in. So it’s kind of a tricky one.
But, the reason why I find that interesting is that back in the day business was business and personal was personal. So businesses did their thing and they didn’t get involved in social issues. They sold pipes or mowed lawns in your landscaping scenario, or did whatever. Now, it’s almost becoming a thing that businesses, both big and small, need to get involved a little bit more. To the extent that employees judge the business owners based on their involvement in social causes, and now consumers say that you could be losing customers if you’re not more socially active. What do you think about that? Would you spend more money at a business … say, you love dogs. So say you have …
Elizabeth: I actually have a really good example of this. I started buying a new shampoo. This is true.
Gene: This is not something I do very often.
Elizabeth: And so, I bought shampoo and conditioner from this com … It’s like a small online company. And so, this was November. And then in December I was looking around for gifts. I have a nephew who’s eight, and I have some friends who have seven or eight year old kids and I thought, I don’t want to get these kids another toy, or something like that, so I usually get them books. Anyway, this is kind of a long story.
Gene: You’re the aunt that gets books for your nieces and nephews? Why don’t you just get them socks? Aunt Elizabeth’s gifts. Yay! Can’t wait to open that.
Elizabeth: I found this elephant sanctuary in Africa and for $50 you can “adopt” one of the elephants and every month you get a letter from the sanctuary with a journal about what the elephant.
Gene: I like that. Sure.
Elizabeth: They’re baby elephants. Like what the elephant was doing. So anyway, I decided to get this. It was like $50 to adopt an elephant for a year. And when you get it you get the certificate from them, like, “You are now the proud foster parent of an elephant.” So I got this for a couple of my friends’ kids and my nephew, and then the week after Christmas I got a letter, an email, from this shampoo and conditioner, this hair care company that said we’ve adopted an elephant. And it was the same sanctuary that I had adopted from.
Gene: Oh my gosh! That’s amazing! So must’ve really been loving that, right?
Elizabeth: I felt so much more affinity for this hair care … Even though their products are a little more expensive than I would normally spend, I was so impressed by that.
Gene: You know it’s funny, I mean, like you said about the products being more expensive, in the end, it is about your product, service, and price, it’s all important. But, if all of those things are being equal I think people, right, they’ll lean towards going with companies that are more supportive. Now again, like the survey said, it’s a tricky line because if you support some social cause, I don’t know, if you pick up some controversial cause that you’re supporting, you might lose customers because of it. So you’ve got to be careful.
Elizabeth: I think elephants are pretty …
Gene: Okay, you might lose the contingent of hunters that are consumers, but how many hunters are washing their hair anyway, right? So if you’re a shampoo customer, you’re probably fine.
Elizabeth: Yeah, I think it was a pretty safe … I mean, it’s a company that’s trying to appeal to millennial and gen-x women who are …
Gene: Makes complete sense.
Elizabeth: An elephant adoption fits right in there. But, I know, speaking as an employee of The Hartford, we support a lot of causes around the Hartford area. It’s very, very important to a lot of the employees here who do a lot of volunteering, and it really makes a big difference with recruiting people, especially younger people really want to know that you have good ethics and that you’re charitable and it’s important.
Gene: You know, it’s funny, you do wonder if it turns into more business, I mean, this is going to sound really selfish, but if I were to say that my company, The Marks Group, was going to give one percent of its revenues to this charity or that, right, so again, I’m giving up one percent of my revenues to this. Obviously it’s cash going out, but would that be made up by maybe potentially more customers that say, “Wow, we want to, or enjoy doing business with these people because they support this cause?” Do you know what I mean? Would there be an offset?
Elizabeth: I think there would be eventually over time, but also, do you get a tax break for that?
Gene: You get a charitable deduction that you can take. So there is a break, but it’s still, you’re still spending money on it. But it just seems like nowadays … Because it’s a thing on my mind. We are involved, my wife and I, in a couple of local charities, but we’re only doing it personally. And I think, geez, I was writing this article, and after reading this research and saying you know, should I make it more of a company thing as well, because maybe prespective clients are just …
Elizabeth: Well, maybe you should adopt a baby elephant.
Gene: I’m a big supporter of elephant rights, so, yeah, maybe I should. Maybe I should.
Elizabeth: Actually, maybe we should do a show about that, like different …
Gene: Baby elephants?
Gene: I know nothing about elephants.
Elizabeth: Different charities or causes that companies could support that maybe they wouldn’t be isolating anyone.
Gene: Maybe. There’s a long list.
Elizabeth: Yeah. Hunger, Children.
Gene: Hunger seems to be … Yeah. Animal charities seem right, diseases, things like cancer, whatever.
Elizabeth: Diseases are always good.
Gene: Always good.
Elizabeth: Okay. Thanks for joining us this week everyone. We’ll be back in a couple days with an episode about market research and whether or not it would be useful for your small business.
Gene: No. It won’t be, but we’ll discuss why later.
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