What to do when your client doesn’t pay

Many of the posts in my blog are written from clients’ / buyers’ standpoint, this one is different – I am switching sides to take a look at one of the most painful issues of working with small business clients (and sometimes large clients as well) – not being paid for your services. A few weeks ago I talked with an old friend of mine who is an owner of small software development firm based in Russia. He told me that his business would’ve been extremely profitable and vastly successful if he was always paid for his services. I was shocked to hear that typically he gets paid for not more than 70% of the services he delivers. Alex’s company sells to a variety of clients in Western Europe, United States, and locally in Russia. He told me that his local clients are the worst with government clients refusing to pay being a most common scenario.

Well, there is nothing I can offer in terms of advice in dealing with Russian government clients. But they are not the only ones, many “legitimate” businesses in Europe and the States follow the suit and are late or delinquent with payments to their vendors. One of the cases described by Alex involved a fairly large South Carolina based company, that used all kind of excuses to explain increase in past due balances, and then when unpaid amount was about to kill the vendor, the company switched the tune – accusing the vendor in all kind of issues ranging from late deliveries to stealing IP. This situation, a reputable US company playing dirty tricks, was somewhat new for Alex. It caught him off-guard and almost put him out of business.

Not paying to a freelancer who did an OK job or refusing to pay to vendor that did not perform against some, possibly unstated, expectations seems like all too common practice nowadays. Even if you do a stellar job and get non-stop kudos for the services you deliver you are not guaranteed to get paid. There are many reasons for that – in some cases the clients run out of money, in some cases they see it as an opportunity to cover up their own mistakes or just as an easy way to improve their bottom line. Whatever the reason or excuse is basically irrelevant. Not paying to vendor that delivered against its contractual obligations is equivalent to stealing the money, but it’s rarely treated as a crime it actually is.

By the way, don’t think that large clients won’t try to screw you out of your money. While most of self-respecting corporations won’t do it, there are plenty that will. I once worked with a very large corporation (in fact I am certain you know this company well) that is notorious for not paying their vendors in any situation where they could get away with it. My company end up losing over half a million dollar on this “dream client”.

So what can you do to prevent yourself from losing your business to one of those disasters and what to do when your client doesn’t pay?

What to do before you engage:

  • Put a solid written contract in place, even if the scope of the project is small. That’s a must – for every client, every job, every time.
  • Define payment process and terms in a great level of details – payment schedules, milestones, late fees, etc.
  • Make sure you identify dispute resolution process. Aim for state with vendor friendly corp. laws, e.g. CA.
  • Aim for pre-payment or deposits. A well known rule of psychology tells us that the perceived value of services quickly deteriorates after the service rendered. Think of a graphic example – prostitutes always get money in advance, since the chances of getting paid go down dramatically after the services are rendered. A john may say, 100 bucks for that!? I could’ve done it myself!
  • For smaller projects consider using market places such as elance or odesk – the fees they charge go long way to address non-payment risks.
  • Use escrows when possible to ensure that client has the money to cover your services.
  • Do not go for a client if you suspect payment problems – there is plenty of fish in the sea.

What to do while you deliver the services:

  • Confirm delivery milestones. Get written user acceptance.
  • Control customer satisfaction and keep written record of all positive and negative events; for all issues keep track of the details and resolution.
  • Keep bullet proof paper trail and do not delete any emails that could be even remotely relevant.
  • Control payment process from the day one and do not take lightly any delays, miscalculations, and “innocent” mistakes.
  • Try to get as much insight in the customer financial situation.

What to do after you delivered the services:

  • Confirm final delivery and get written user acceptance.
  • If possible make sure that final deliverables change hands at the same time as final payment.
  • Validate and archive you paper trail.

What to do if you see payment issues during the contract execution:

  • Not all payment issues are necessary malicious or signs of serious problems to come. Most of them are. In some cases the client is testing your tolerance, in some cases executing a common routine. So while you do not need to go after your client with the first delayed payment, you should be on yellow or maybe orange alert.
  • If the payment issues persist take action. Move early and swift. Don’t get onto a slippery slope of issue resolution while still providing services. You will be losing money with every day of services you provide… and you cannot make up in volume.
  • You may start with personal appeals or soft actions. Going through regular AP – AR phone calls and issue resolutions. In meanwhile be prepared to take stronger actions and decisive steps.

And what to do in case you still did not get paid:

  • One of the most important (and first) steps to take is to stop providing services to your client. That might be very difficult to do for a number of reasons including in part the fact that this takes the client off the hook and they have really no reasons to pay you, or it could put your client out of business and then all bets are off. However, the longer you stay engaged and the longer you provide the services the deeper is the hole you are digging yourself into.
  • It’s time to get legal help – you contract may require different steps such as take the client to arbitration or other steps for resolving the issues.
  • Consider using collection agencies. Selling your accounts receivables to them could be the easiest (even though a rather expensive proposition.
  • If you bailed out of the relationship early and the debt is not too high, you should consider suing the client in small claims court. Unfortunately that applies to only small amounts and the limit is normally between $2,000 and $7,500, depending on your state.
  • If the client owes you more than can be handled in a small claims court, you can sue them in a state trial court, the municipal court or superior court. Debt collection cases are often very simple, so you can probably handle them yourself or with limited help of a lawyer. To the best of my knowledge very few collection cases ever go to trial. Usually, the defendant either agrees to settle before trial or fails to show up in court and that gives you a default victory.

And that’s pretty much exhaust your options. Some of them might give you a chance to get most of your money, but it’s going to take a while. And that’s not really the worst case scenario. For example if your client is out of business or declares a bankruptcy you may never see the money you so diligently worked for. And that only reinforces the point that you need act early and swift with first confirmed signs of clients’ inability to pay you.

2 thoughts on “What to do when your client doesn’t pay

  1. I’m awed that you were able to share you and your friend’s tough experiences in the outsourcing world. It’s actually great to undergo such occurrences because people will eventually learn from it. Being careful, for me, is the key. Be careful at the beginning until the end! It must be really an awful experience to not get paid after you’ve done everything for the client. I hope our fellow companies don’t usually experience this… Outsourcing is supposed to outcome a win-win situation between parties, right?

  2. This post was very helpful, I’m kinda new to blogging right now, and I’m trying to look for job in the outsourcing world, and it didn’t come to my mind that their are instances that you don’t get paid for your efforts. Also I agree with the idea that having to experience this problem isn’t bad at all, because you may be able to learn from it, charge to experience.

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