What to do if a client is struggling to pay you
Because it doesn’t take too many non-paying customers to create trouble, far too often a rural builder must be concerned not only with his or her operation’s financial well-being, but also the financial situation of both customers and suppliers.
There are always customers that go out of business without warning—or without paying their bills. In these cases, it is often too late to collect anything. However, if the owner or manager of a building business is vigilant, many losses may be averted. There are also strategies for dealing with troubled customers before the dreaded final step of “firing” them.
It’s far 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.
Although a credit check is important, it’s not fail-safe. Obviously, things can go south quickly, so minimizing exposure to a customer or potential customer’s credit troubles requires every builder and contractor to exercise “due diligence.”
That can be as basic as paying attention to the comments of customers or potential customers whenever money is discussed. A customer or client who, for instance, begins negotiations by offering half of a proposed fee is not a good sign. Perhaps the customer or potential customer cannot afford the service, the quality of the service or the timing of the service.
Due diligence also means staying on top of paperwork. It is all too easy to fall behind on invoicing in the midst of big projects, but letting it slide for a month or two will put the building business at risk. Before you know it, a customer owes $5,000, $10,000 or more. To avoid this problem, establishing regular routines for billing customers that reflect their preferences, such as sending an invoice every two weeks, might be a good strategy. If customers start taking longer than usual to pay it, it becomes readily noticeable.
Staying alert for signs that customers’ financial situations are changing can protect any business. Various indications of possible trouble include:
- Requests for price changes with or without changes in the number, frequency or types of services performed. A customer who doesn’t understand the true value of the work performed is often reluctant to pay in full, even if not in financial trouble, so these should be screened out from the beginning.
- Negative publicity or press, especially delinquent tax notices.
- Rumors, particularly those involving slow payments to others, sudden large payments to insiders, or poor cash management.
- Deteriorating market position relative to the customer’s competitors.
- Employment of various types of consultants.
- Lack of focus by management or response to requests.
A number of strategies should immediately kick-in whenever financial troubles appear imminent including:
- Cashing checks promptly. And keeping records of when checks are received.
- Conditioning future business on payment for the new services or goods AND some reduction in the past-due amounts. Payments that are “contemporaneous exchanges” are immune from preference challenge by a bankruptcy trustee.
- Without evidence that payments were for the new goods or services, rather than the old balance, courts tend to apply payment to the oldest charges, exposing the payment to recapture.
- Selling C.O.D. is excellent protection against greedy bankruptcy trustees.
- Perfect any lien rights the building business may have.
- Don’t let the threat of a customer filing for bankruptcy deter a lawsuit if the debtor is believed to have assets from which the claim can be satisfied.
- Talk to a collection attorney about your rights to a pre-judgment attachment.
- Don’t hesitate to accept payment on account because of the possibility that the payment may be refundable as a “preference” if the customer files bankruptcy. It is not wrong to accept money genuinely owed to the business; neither is it wrong of the soon-to-be-debtor to pay it. It simply may be recoverable by a trustee.
Most builders and contractors are aware that contracts and payment terms should always be put in writing. Unfortunately, this alone may not protect the business if a customer runs into financial problems. Few troubled customers are likely to begin paying simply because there is a contract.
One or two customers can put any business at risk if payments from them slows or dries up. Even a builder or contractor whose plate is full might be well advised to continually look for new customers. Make sure there is a constant inflow of customers so, if one fails and isn’t able to pay on time, potential problems are avoided. It also provides more time—and a financial cushion—to work things out with a troubled customer.
The first step to turning troubled customers into valuable assets is determining whether the relationship is worth saving. A builder or contractor who believes in holding onto every customer, no matter what the cost, may never see their business reach its maximum earning potential.
Before asking any customer to take his business elsewhere, efforts should be made at “reforming” the customer. There is no clear rule-of -thumb as each situation—and each customer —is different. If the problem is one of slow pay with a smaller customer, services can often be postponed or delivered on a C.O.D. basis until they’ve paid up.
The same approach may work for larger customers if the business has enough leverage. Alternatively, a price increase to offset the higher cost of extending credit might be called for.
Worried about the customer going elsewhere? Sometimes that’s a good thing. Troubled or problem customers become problems for competitors.
Often ignored by many builders and contractors is whether the best business decision may actually involve FIRING some of their worst customers. While this may seem like an illogical suggestion (particularly in a bad economy), having the wrong customers can be costing the business in unexpected ways and holding it back from real success over the temptation of short -term profits.
There’s one thing that no business owner likes: trying to collect from customers who have run short of money. Unfortunately, wringing money out of deadbeat customers has become a common issue in today’s slow-growing economy. In some cases, the only option may be hiring a collection agency or going to court to collect.
Diligent builders and contractors may be able to minimize their risk and bad debt by paying attention to a customer’s payment habits, its’ standing in the trade and potentially anticipating a customer filing for bankruptcy. Using various techniques to monitor a customer’s payment practices, its standing in the credit community and other financial indicators can significantly reduce the financial headaches of any builder or contractor and contribute to a healthier bottom-line. After all, to stay in business means dealing with all customers, warts and all. RB