SCORE Small Business Blog

5 Tips for Preventing and Dealing with Non-Paying Clients

Late or non-paying clients are a hard fact of business. Small businesses in particular are vulnerable because they lack the accounting and legal resources to deal with these customers, with collections falling squarely on the shoulders of the business owner. Likewise, smaller firms and sole proprietors eager to acquire new clients often rely on loosely structured quotes, estimates, statements of work and other non-binding agreements to secure new business.

Here are some approaches that your small business can take to mitigate the risk of dealing with late or non-payment, as well as some options for collecting that debt.

Develop a Payment Policy and Discuss It with Your Client

Part-payment policies by which a client pays a portion of your fee up front are common in service-based businesses – particularly where you need to make an upfront investment in inventory or equipment to get the job done. Try to secure 50 percent of your fee up front if you can. You should also agree on invoicing terms in advance.

If your client is a consumer, be aggressive with your final payment terms – 7-10 days upon receipt of invoice is normal. For business clients (B2B), the industry standard these days is 30 days. Many companies can deliver within 15 days – particularly  smaller, more agile business clients – so don’t be afraid to ask and negotiate.

Consider a Late Payment Fee

A late-payment fee is basically an incentive to pay on time. You will need to build language around this into a contract or payment policy before doing any work. Late fees are typically a percentage of the total bill (usually 6-10 percent per year, although you should check this with a lawyer). Any interest charged on late payments might also be subject to state laws, which limit the amount of interest that can be charged.

Put a Collections Plan in Place

There are many reasons why a client won’t pay, but if you have delivered services or products in good faith and the client has not complained about your business, these soft measures can help you deal with any non-payment:

  • Re-issue past due bills – As soon as your first bill is past due, reach out to the client and ask them if the bill was received and is in process. You may need to re-bill as a gentle reminder. You can also send a monthly statement with the outstanding amount owed (with interest, if your policies or contract stipulate a late fee) clearly labeled as past due.
  • Get to know your client’s accounts department – If payment is still not forthcoming, seek out the accounts payable department (call the client front desk or operator). Check whether the invoice was received and if you can help in any way. All the while, maintain a steady and friendly relationship. Don’t hang up until you get a verbal agreement confirming when the payment will be made. Follow-up over e-mail confirming the conversation and maintain a paper trail.  If this fails, bring it to the attention of a VP or President of the company.
  • Don’t apologize – Stick to your guns and never apologize for chasing payment.
  • Offer a payment plan – You may want to offer a payment plan, especially if you have a good relationship with the client and they are having cash flow problems.

If All Else Fails – Threaten Legal Action and Be Ready to Report the Client

If your “soft” approach has failed and the invoice runs past due more than 60 days, you may need to threaten legal action and/or report the client to the Better Business Bureau. Alternate options include working with an attorney to issue a demand payment letter or filing with a small claims court if the arrears is under $3,000. The latter is a cheaper option since a lawyer need not be involved.

If Your Client Files for Bankruptcy

If you suspect bankruptcy is in the cards – look out for a lack of communication from senior employees, adverse industry conditions, etc. – consult an attorney and always file a proof of claim. Once a bankruptcy petition has been filed, the debtor has the benefit of an automatic stay. This prevents you from taking any further action to collect the debt unless, or until, the bankruptcy court decides to the contrary.

U.S. Small Business Administration
The SBA is an independent federal agency that works to assist and protect the interests of American small businesses. The agency delivers the answers, support and resources small businesses need to start-up, grow and succeed through district offices throughout the U.S. and a network of resource partners including SCORE. | Facebook | @SBAgov | More from the SBA

// |

Discussion (5) Comment

  1. JasonVisitor

    Great article and comments. I like what K.C. said above. Delivering top quality products and services is always necessary to maximize profits and minimize troublesome invoices.

    From 15 years in the collection industry, my point of view sees a crucial step missing. Regardless of how perfect your process, products/services, and basic follow-up you will still have slow and the eventual NO payers.

    At that point businesses do not have the time or expertise to turn as much of that (average 18.xx%) as possible back into cash. That’s why I recommend having a top quality collection partner. Once the accounts go over 90 days past due, and aren’t responding to your attempts to collect, it’s time to “set it and forget it” so to speak and go back to doing what YOU do best.

    Forward it to a collection partner who will handle it professionally and invest the time, experience, resources, and persistence it will require to ensure you get as much as possible as soon as possible.

    Here is why that makes sense.

    -We have the time, and real world experience to ensure maximum recovery.

    -We don’t get paid unless you get paid. The small fee we charge is paid for by all the extra time you have not needing to spend the many hours of dedication it will take to recover everything possible. That cost is also offset by the fact you have a personal consultant with 15 years experience who will recover more than you would going it alone.

    -It’s the third party involvment that many non-payers are waiting for. Another letter from you is no different than your first invoice.

    -It’s a smart money step to avoid the time consuming, costly, and invasive legal action process; which in many cases won’t be at all cost effective or possible. A professional collection/mediation step is always a logical step in the collection process regardless. If it’s unsuccesful, you are out no funds, and it helps your case to have tried an amicable third party mediation prior to litigation.

    This really only scratches the surface. Don’t let old stereotypes hold back your bottom line. Click on my name and read my blog for facts on smart money profit maximization from a top quality, private practice collection firm.

    Best of luck everyone, may your cash flow in the right direction.

  2. Hi, just a short comment on previous Charles Harris’s comments from a debt professional that has used all possible collecting techniques. Letter of Demand would certainly make a statement, but would only make certain clients/customers pay up as a result of it. There are many variables that go into the formula that works out if the debtor pays after a Letter of Demand. From my experience, there would be a percentage that would pay; the rest would ignore it depending of the amount in question. These days debtors are quite knowledgeable as to what the creditor’s cost is to chase the debt through the Legal System. Many debtors know that if it is a small amount being chased – the case would probably never land at court due to the high time and financial cost involved. You can get more in depth insight on debt collecting at or

  3. K.C.Visitor

    I operated a printed products distributorship for 16 years and had very little problem with non-payment, I believe, for the following reasons: I exceeded my customer’s expectations. I conducted my business in a professional manner. I expected to be paid on time. I followed up personally on all past due accounts. I became a valuable asset to my customers who did not want to lose me as a vendor due to non-payment or chronic late payment.

    • Dear K.C., congratulations! You have been doing most of the things that bad debtors list as reasons for non payment. The truth is that great customer service cuts bad debt to the bone – the fact that many businesses do not acknowledge.

  4. I have a friend who has a marketing and promotions business that her and her sister started. She says early on, she had a hard time collecting from clients. She eventually became a member with LegalShield and her provider law firm wrote letters for her company to her unpaying clients.

    Just like the article says, a letter coming from an attorney on her behalf was very effective. It was really inexpensive, too, because that benefit/service was part of her membership. After 20 years, she says she no longer has that problem of non paying clients – at least not like she did early on in her business.


Leave a Comment

More Blog Topics