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How to Deal with Deadbeat Customers
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Sometimes, no matter what precautions you take or how well you manage your receivables, there are just some customers that won’t pay on time, even if at all. But, there’s still hope for you to get the money you deserve. Here are 5 ways to deal with late paying customers:

1. Factor the Invoice – A great option to get cash for your unpaid invoices is by factoring your invoice. When you factor your invoices, a “factor” buys these invoices at a discount, and then collects the full payment from your customer. This gives you cash in your hand immediately. The factor is paying you a percentage of the invoice paid value upfront, known as the advance (which is usually around 70-85% the invoice amount). The factor then holds onto the remainder, which will be paid to you upon fulfillment of the invoice, minus the charges or fees of the factors.

2. File a Lien – Mechanics liens are a special instrument for those businesses who are construction contractors or suppliers. “If a supplier or contractor furnishes services or materials to a construction project and is not paid, that supplier or contractor can generally file a mechanics lien to ‘secure’ the debt”, says Scott Wolfe Jr.  In other words, the property becomes collateral to guarantee payment. A lien doesn’t send a property off to auction, but is the action to claim the job as collateral. In short, it puts your business in a “collectable position.”

3. Call a Lawyer – A good way to get a seriously delinquent account to pay is to have an attorney contact the debtor. As Justin Tenuto from Rocket Lawyer points out, “Sometimes, a professional correspondence from a practicing attorney will motivate your debtor to pay up. After all, debtors don’t want to end up before a judge, explaining their motives for not paying you.” If you think your customer needs just a little push, hiring a lawyer to make contact can be the key. However, be sure to perform a cost-benefit analysis to make sure the lawyer’s fee isn’t more than the debt you are looking to collect.

4. Hire a Collection Agency – Sometimes when you know there is no hope for a customer, it’s time to send them to a collection agency. Although collection agencies have a bad rap, the actions of some does not define them all. When you feel it’s time to send an account to collection, it’s all about performing the right due diligence on an agency. Be sure to ask the right questions when searching for an agency, so you’ll know they’ll treat your customers well. When you send your account to collections, be aware you will only pay if they collect. However, their fees run high. If they are successful, sometimes you can end up paying them 30% – 50% of the invoice. Only use a collection agency as a last resort.

5. Write It Off – If you determine a receivable is impossible to collect, you can write it off. The IRS requires the direct write-off method for receivables, and to reiterate, it can only be written off once you stop actively collecting. In fact, you will only need to report an estimate of how much you don’t think you’ll collect. You don’t have to guess who won’t pay you or what the exact amount that you aren’t paid will be. Just always use a conservative estimate. So, when do you decide it’s time to give up? Look at how long the account has been past due. If it’s older than 6 months, it’s safe to say it can’t be collected.

Nothing’s worse than a customer that won’t pay. However, if you get stuck with a deadbeat, remember your options!

Meredith WoodDirector of Community Relations, Funding Gates
Meredith is the Director of Community Relations at Funding Gates, the world’s first CRM for receivables management. An avid small business writer, Meredith’s work can be seen on American Express OPEN Forum, the Small Business Bonfire, YFS Entrepreneur and many other small business sites.
www.fundinggates.com | Facebook | @FundingGates | More from Meredith

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Discussion (7) Comment


  1. MeredithAuthor

    What great responses!

    Harry, I absolutely agree. I wrote a lot about those details in the prior post to this, however I didn’t include the payment plan, which is awesome advice. We really push our users to consider that, as it automatically increases collectability rates.

    Monika, great thing this guy will have to face his past decisions when trying to apply for credit. That’s nuts! Did you write off the debt?

    Dan, I definitely agree, try to confront the customer directly. A lot of times these means finally making the call/visit instead of your AR person!

    Dan, great question! Has the university responded at all to your collection efforts? Are they making excuses or ignoring the bill?

    Keith, I <3 this video!! Docracy also did a great video you should check out http://www.dontgetscrewedover.com/

    Brad, great, great advice. Do you do business with companies in all states?


  2. Brad MarcusVisitor

    If you use a factor make sure it is a non-recourse contract otherwise the unpaid invoice will be given back to you to collect.

    Lawyers should be used only if the agency is unable to collect.
    If am so wrong why do the largest banks and factors use us instead.

    As a commercial collection agency since 1979 we regularly see claims that are way past due. Businesses hold past due invoices for a number of reasons, but the number one reason is that they are afraid of losing a client. Remember no matter how long and well you know them, if they don’t pay they are no longer a client. We all understand that it has been difficult for businesses to make money in the past few years and they may not be able to pay the invoice at the time. There is no excuse for not returning calls, replying to emails or letters or communicating with you regarding their financial circumstances; especially if they have been a client for a number of years.

    The Commercial Law League Agency Section of which we are a member, reports that the probability of full collection on a delinquent account drops dramatically with the length of delinquency. For three months the probability off collection drops to 69.6%, after six months to 52.1% and after one year drops to 22.8%.

    We recommend that you establish standard operating procedures for Accounts Receivable. On the 80th day you send a final demand letter and if nothing happens in 10 days, the collection agency takes over. If you follow my recommendations for Terms to Include on Credit Applications article, you can be compensated by the debtor for their delinquency.


  3. Keith JamesVisitor

    I think Mike Monteiro summed it up best in one of his Creative Mornings videos. Most of you know what I am referring to but be forewarned.

    ******* WARNING******* NSFW ******** this video contains harsh adult language!

    http://vimeo.com/22053820


  4. DanVisitor

    Do you have a workable solution when your customers are federally funded Universities and they are from 60 to 120 days late? What is a small company going to do when up against the fact that our government has fouled up its finances so bad that it cant even pay its obligations? Our GDP is not adequate to compensate for the governments wasteful spending. Domestic suppliers are declining and the business environment for growth is being hindered by the bureaucracy. Have an answer for that? We have lost our dominance in so much of our vital productive infrastructure that I am scared $#!^less! How are we ever going to get back our economic strength and security as a nation with the boneheads we currently have in our leadership?


  5. DanVisitor

    There are many “worst case” scenarios collecting invoices, especially in this economy and from small business. How about getting out of your chair and visiting the client? Start it as a CSR meeting, then address the debt at the end. You may discover the client has a beef or a cash issue. Work it out, keep the attorneys away, service your customers like never before!!


  6. Monika JansenVisitor

    Great article Meredith! Unfortunately, no matter what you do, sometimes you really do get stiffed. I am still owed $2,000 by a (former, obviously!) client for a huge editing project I did for him in February 2012. After trying very nicely to collect for 4 months, my attorney sent a letter via certified mail. Crickets. Then I sued him in small claims court. Again, crickets. He didn’t even show up for court! Now he has a bad credit record.


  7. HarryVisitor

    Meredith – All these are great suggestions. Before trying any of these, however, you should try to see if there is any way you can make them pay. Some of the techniques you can try are offering a discount, setting up a payment plan, etc. You will most likely end up with more money in your pocket with these options before filing a lien or calling a lawyer.

 

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