What To Do When A Client Doesn’t Pay

You’ve provided services or sold your products in good faith, sent out invoices, and waited patiently, only to end up frustrated and dealing with a client who won’t pay their outstanding debt. Frustration aside, it’s important to know exactly what to do when a client doesn’t pay, so you can increase your chances of getting paid what’s owed.

With the US’s debt collection industry accruing an annual revenue of about $13.4 billion, it’s safe to say that non-paying customers are a fairly common occurrence in the business realm. However, before you send your customer accounts to collections and wash your hands of the matter, make sure you have exhausted all viable means of contact and collection with the customer.

This guide is going to break down the different strategies for resolving unpaid debts. Let’s help get you paid.

6 Strategies To Try If A Client Doesn’t Pay

Fortunately, there are many ways to encourage a client to cover their debts to your business. From sending updated invoices with late fees tacked on to completing a service termination, here are some effective strategies designed to help your business recover unpaid debts.

1. Make Multiple Attempts To Contact Your Client

There may be some legitimate reasons why a client is not be responding to your attempts to contact them. Your client may have lost access to their email account or changed phone providers. Your messages could have been filtered to spam. That said, some clients could be purposely dodging your attempts to contact them to avoid being held accountable for their debts. Regardless of why your messages aren’t being answered, directly contacting your client about their unpaid invoices is the first step to recovering your lost income or revenue.

Once the payment grace period has ended and your clients are firmly in the “late payment” range, send personalized follow-ups via multiple channels. Start with a single message to their preferred contact method warning them of their late payment and any penalties they may incur. Specify the time left to get their debts paid and/or get in contact with you to discuss payment options. If you have not gotten a client response via traditional contact channels, move on to messages across different channels, including phone calls, emails, and social media messages. Consider the latter option a last resort, especially if you will be contacting a private social media account.

Never allow a conversation about unpaid debts devolve into an argument with name-calling, foul words, or anything you would regret having associated with your business.

Yes, you may be frustrated with a lack of payment or communication. However, keeping your frustration at bay, even amidst attacks or denial from your client, will help you avoid tarnishing your business’s reputation. All it takes is one negative review with supporting images of you blowing a fuse to lose revenue and customers, and irreparably damage your business’s reputation.

Finally, it’s important to keep records of these collection attempts. If you call and leave a voicemail, follow up with an email reiterating the terms of the voicemail or phone call. Depending on how far the issue goes, you may need to present evidence that you repeatedly tried to get the debt collected.

2. Discuss A Payment Installment Plan

To establish an installment plan, you must be able to contact the client directly and the client must be willing to sign an installment plan agreement. This kind of communication with clients is a sign of good faith on their end, especially if they are the ones who initiate contact. These clients have a desire to settle their debt, unlike those ducking your calls at every opportunity. After discussing the reason behind your client’s late payment, usually in the realm of financial hardship or unexpected emergencies, you can discuss installment plan payment options that work for your business and the customer.

Keep in mind that you have already held up your end of the bargain by providing services or products, and now you’re putting in the effort to work with your customer to resolve their debt. So, while it’s important to hear your customer out, don’t allow installment plans agreements to become a negotiation. Look at the debt from a business perspective and evaluate how much of the debt your business needs and by when. Let that information guide the installment plan agreement terms. For example, if a client has racked up a $6,000 debt and your business needs at least $2,000 of that debt each month, you may choose to set the installment agreement plan at $2,000 by the 28th of each month for three months.

If your client defaults on the installment plan agreement, be sure that there are terms that will help you recover the money you lost in another way. For example, you may include a clause that renders the initial installment plan agreement null and void in the event of a missed payment. You may also include a missed payment clause that tacks on an interest charge to the remaining debt.

3. Charge A Late Fee

Late payment fees serve the dual purpose of encouraging clients to pay their debts on time and softening the financial blow your business may experience as a result of late-paying customers. That’s why it’s strongly recommended that you include a late payment fee clause in your business’s client contract. If you fail to draw up a signed contract that requires your client to pay late fees, there’s a good chance that your client won’t be obligated to pay them if the matter is taken to court.

Here’s a look at a sample late payment fee clause to include in your contract with the client and your business invoices.

“[Your Business Name] reserves the right to impose a late payment fee of [$$$] if payment is received more than [late payment grace period] after the invoice payment is due. The late payment fee will be imposed [how often the late payment fee will be imposed].”

If your business has reserved the right to impose late payment fees, whether through a business contract or within its invoice terms, now is the time to use it. Start by sending out a warning during the late payment grace period letting the client know that you will be charging a late fee after the grace period has ended. If the client has not gotten in touch with your business or paid their debt at the end of the grace period, send along an updated invoice that includes a late payment fee.

There’s a good chance that your customer may be inclined to get the late fee removed by paying some or all of their debt. This tactic is especially useful if you have a late fee that can be charged repeatedly until the debt is resolved. It’s rare that you’ll have to face a customer who will completely ignore a $300 debt running up to a $1,000 debt.

4. Cut Services

Cutting services is rarely the right first step when it comes to dealing with non-paying customers. However, cutting services is the right move if you have made multiple attempts to contact your client and have yet to get the debt resolved. After you’ve given them due notice of their debt, you should immediately notify your client that you will be discontinuing services due to non-payment. Then, cut the metaphorical cord. Don’t allow a non-paying client to continue to use your services or products for free.

5. Connect With Customer Support

Freelancers who are working on third-party platforms, like Upwork and Fiverr, do have some protection when it comes to clients who won’t pay their bills. Depending on the contract and client, Upwork offers a Payment Protection policy that protects payments to freelancers and agencies. Any disputes are handled by Upwork’s internal support with both freelancers and clients able to file disputes for review. Generally, if you have completed the work in compliance with the platform’s policy, your payments will come to you on both hourly and fixed-price contracts.

Fiverr’s seller protection system is a little different, but does offer some payment protection. If a client has paid you, but then disputes the transaction with their bank, the bank may issue a chargeback. The total amount of the chargeback will be deducted from your account. Fiverr’s Trust and Safety team will review the problem, but there’s no guarantee that the chargeback will be reversed.

Of course, not every dispute will go your way. However, if you are working with a reputable freelancer platform, there’s a good chance that you’ll have some support when dealing with clients who don’t pay.

6. Connect With Company Leadership

Depending on the size of the business you are working with, you may have the option to climb a little higher on the leadership ladder to resolve your debt issue. For example, if you have only been able to contact the company’s accounts receivable department to no avail, try to contact the business’s owner or CEO directly via email to explain the problem. You might find that communicating with the right person does wonders for getting problems solved.

What To Do When A Client Still Won’t Pay?

Unfortunately, there are cases when a client still won’t pay, even after you have exhausted all means of debt resolution. If less aggressive solutions have failed, it may be time to consider bringing in outside help or simply cutting your losses. Here’s a look at some of the options businesses have when pursuing unpaid client debt.

Invoice Factoring

Factoring is a short-term solution that can provide immediate cash flow for cash-strapped businesses. Factor financing allows a business to sell its accounts receivables to an invoice factoring company or financial provider. The factor pays the business a high percentage of the account’s value (think: $750,000 of a $1m debt). Once the factor collects the entire debt from the account, your business receives the remaining percentage of the debt minus commission and other fees. If you consider factoring for your business, understand that there are usually restrictions that include your business’s age, annual revenue, and much more that may reduce your chances of qualifying for factoring services.

Debt Collection Agency

A debt collection agency can help reduce losses by purchasing your business’s delinquent accounts or collecting the funds on your business’s behalf and charging fees for their services. With the latter service, your business will be paid after the debt (or a portion of it) has been collected. Debt collection agencies are viable options for larger businesses with many delinquent accounts that can be sold in large batches or collected over time.

Small Claims Court

Small claims court is an option for businesses that have exhausted all other avenues of debt collection and want legal aid in settling the debt. There are restrictions that pertain to which cases you can bring to small claims court and whether your business will be permitted to retain legal counsel. For example, New York City’s small claims court limits suits to claims of $5,000 or less. So, if a customer owes more than that, you’ll need to take your legal action further up the chain. Additionally, your business may or may not be allowed to lawyer up in a small claims court suit depending on your local laws, so review your local laws before choosing this route.

Bad Debt Write Off

A bad debt write-off may feel like giving up, but sometimes it’s worth it to cut your losses. If a client won’t pay and you don’t want to waste any more valuable time or resources to pursue the debt, you can write it off. The process of writing off a bad debt consists of its removal from your company’s asset line and being transitioned to an expense for the company. In short, it comes out of your business’s coffers.

How To Take Legal Action For Non-Paying Clients

Pursuing legal action against a client who has not paid is an option worth considering if you have already made significant attempts to collect the debt without legal intervention and you are confident that your client will pay up if you win your suit.

Unfortunately, even if you win your case against a non-paying customer, they may not pay you voluntarily. The client may not have the funds or assets to cover their debt or they may have hidden their assets in an attempt to dodge court-ordered wage garnishments or asset seizure. Either way, you’ll need to gauge whether a legal judgment will actually land you money if you win.

When you go the legal route, you’ll be dedicating time and money to the collection of the debt; you’ll have to decide whether those are resources you are willing to dedicate even with the possibility of not being paid after winning.

Suing A Client For Non-Payment

If you choose to take legal action against a non-paying client, start by researching your state and local laws regarding claims suits. If your state allows you to retain counsel in small claims court, you should also vet lawyers in the area before settling on one to represent your business.

If suing a client for non-payment, business owners should start by filing a statement of claim or complaint with the appropriate court branch in their county. When filing a statement, you will need to provide the following relevant information:

• Names of those involved
• Addresses for those involved
• The amount you are seeking
• General facts about the case

You may also need to pay a fee to file your claim. Once you have submitted the complaint, the court will move forward with the suit, serving your client/defendant with a summons or notice that they are being sued. A hearing date will be scheduled, and your case will be heard.

The process for suing a client for nonpayment may vary slightly based on your location within the US.

Once your client has been notified of the legal suit against them, they may be inclined to settle out of court. If that’s the case, you need to have any new payment agreement in writing and should consider having an attorney present at signing.

If you win the case, your client is legally required to pay you, except in cases when they can’t. Take note of the payment guidelines set by the court after you have won your case. If a client does not pay by the date (or dates, if an installment plan is ordered) set by the court, you may have grounds to pursue further legal action, including wage garnishments to ensure payment.

How To Write Off Bad Debt For Outstanding Invoices

Writing off bad debt is essentially telling the IRS that you weren’t paid, don’t expect to be, and would like the unpaid debt to be deducted from your business’s reported income. Bad debt write-offs are a viable solution for businesses that are doubtful about their ability to collect on a bad debt, even with legal intervention.

At the tax year’s end, bad debt for sole proprietorships should be reported on IRS Schedule C Form 1040, Line 48 on your business’s tax return. For partnership businesses, bad debt should be filed on Form 1065. If you will be reporting bad debt on your business taxes, you’ll need to prove that the loan was not considered a gift at the time of the exchange.

Writing off bad debt for outstanding invoices can only be done if your business uses accrual basis accounting. Unfortunately, a business cannot write off bad debt if it uses cash basis accounting.

Tracking Bad Debt For Your Business

When reporting bad debt to the IRS, businesses generally use the direct write-off method in which debt that can’t be collected is written off as an expense at the end of the tax year. However, the direct write-off strategy doesn’t work well for business accounting, as unpaid debt represents lost income that impacts a business’s bottom line pretty immediately. For example, if a bad debt is considered uncollectible by March, waiting until the end of the year to internally mark it as uncollectible is not only inefficient, but it can lead to income overstatement.

That’s why businesses use the allowance method to track debt internally. Using the allowance method, businesses can match bad debt to their transactions in the accounting period in which they occur and estimate lost revenue related to bad debt on an ongoing basis. The estimated figure is used to balance an allowance account that is adjusted based on bad debts recorded during the accounting period. So, if a bad debt of $1,000 is expected (but not yet recorded), that amount would be debited by the company and credited to the allowance account.

The whole process is akin to building a savings account to fund an expected expense that’s highly variable, like an annual medical expenses budget line item. You may expect to pay a $2,500 premium for your plan, but a single unexpected ambulance ride and emergency room visit can cause that cost to skyrocket. So, it’s best for your wallet to overestimate expected expenses.

The Bottom Line On Clients Who Don’t Pay

While dealing with non-paying customers is a relatively common business experience, it’s not exactly a welcome one. Collecting unpaid client debts can seem like a herculean task that requires massive amounts of effort and time. That’s why the absolute best method of handling unpaid client debts is to avoid them. That’s right. Be proactive and implement business procedures that reduce the chances that a client will stiff you.

Here are some ways to avoid unpaid invoices in the future.

• Vet prospective clients
• Collect payment beforehand
• Require signed business contracts
• Send invoices quickly
• Set payment terms upfront
• Review accounts receivable aging reports

You have to spend money to make money, sure. However, when it comes to unpaid client debts, it’s more like ‘you have to lose money to make money.’ So, be proactive with collecting payments, avoid chasing late payments, and know when to let debts go. Do this, and you’ll save yourself a lot of headaches in the future.

Want more advice to help you get your invoices paid? Check out our post: Slow-Paying Customers? 10 Tips To Get Your Invoices Paid Faster for helpful tips to help you encourage quick payments from your clients and hopefully avoid having to write off any bad debt in the future.

FAQs On Non-Paying Clients