Owning your own business can be a lot of fun, but there’s one aspect that no business owner likes: Trying to collect from clients who have run short of money. Unfortunately, wringing money out of deadbeat clients has been a common issue for many small firms since the recession. The National Small Business Association’s 2012 Access to Capital Survey found that 21% of businesses found that clients were taking longer to pay them than two years earlier. A growing number of owners are seeing payments take longer than 30 days, according to the survey. “It’s a tough problem, especially in recessionary times,” says attorney Andrew J. Sherman, a partner in the Washington, D.C. office of Jones Day.
In some cases, you’ll have no option but to hire a collection agency or go to court to collect, but many small business owners don’t like to go this route routinely. The NSBA’s survey, for instance, found that just 17% report nonpayments to collection agencies.
Often, it’s easier to take a proactive approach by avoiding the types of clients who usually spell trouble, staying alert to signs that long-time customers are having financial problems and taking quick action when their payments are slowing down. Here are some tips from entrepreneurs and experts on how to keep your business thriving, even if clients hit hard times.
Vet clients carefully. When you’re building a business and need revenues, it’s tempting to take on every customer who wants to work with you. But that’s often a route to collection problems later. To avoid that scenario, Susan Baroncini-Moe, a marketing strategist in Indianapolis, Indiana and author of the upcoming book Business in Blue Jeans, recommends screening clients carefully.
Doing a credit check on a client can be a valuable step, but it’s not failsafe. “In this economy I don’t think a credit report is a good indicator,” says Baroncini-Moe. “Things can go south so quickly.” She recommends paying attention to the comments a potential client makes when discussing money in your initial conversations. If, say, you routinely charge a certain monthly fee for your work and a client tries to start a negotiation by offering half of that, it’s not a good sign. “We may have a situation where a client can’t afford the service I am going to deliver or can’t afford the quality of service I want to deliver,” she says.
A client who doesn’t understand the true value of the work you do may also be reluctant to pay you in full, even if he isn’t in financial trouble, so screen these folks out, too. Baroncini-Moe sees it as a red flag if, in an initial conversation, a potential client seems to have cut corners on marketing in the past, by, for instance, purchasing social media followers. “To me that’s like cheating, and doesn’t work anyway,” she says.
See also: When A Customer Trashes You Online