Introduction

Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.

Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.

If you’ve ever felt legal was too scary, too overwhelming, too complicated, or just plain incomprehensible, you’re not alone. The Simplifying Legal podcast was created to help. 

In each episode, we’ll do a deep dive into a legal topic and give you concrete next steps so you can apply it to your business. 

My goal is for you to walk away from each episode thinking, oh, that was easier than I thought it would be.

Let’s get started. 

Episode Content

Hey there, I’m Danielle. Welcome to episode 24 of Simplifying Legal for Small Business Owners. Today, we’re talking about how to handle late client payments. 

Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first. 

Now, let’s get started with today’s discussion. 

In an ideal world, you would have a relationship with your clients that goes like this. First, you have a great consult and the new client is ready to sign an agreement for your highest priced service package. You quickly execute the agreement. The services are completed and all payments are made on time. Then, of course, they become one of your best referral sources. 

Unfortunately, this isn’t always how it goes. Occasionally, you might have a client who is late making a payment. How to handle a late paying client is one of the most common questions I receive. For many people, it’s a very unusual thing to happen in their business and it takes them completely by surprise. I had one client who had been in business for 7 years before she ever had a client who didn’t make an on-time payment, so you can imagine her surprise and frustration when it happened. 

In this episode, I’m going to talk about late payments from two perspectives. First, we’re going to look at whether or not you can proactively prevent late payments. And, if you can’t prevent them, what can you do to avoid them as much as possible. In other words, what can we do within your contracts and business practices to help prevent late payments. Second, in the event that you do have a late payment, what steps should you follow to get that payment. 

Client Agreement and Avoiding Late Payments

First, let’s talk about those proactive steps for avoiding late payments. 

If you are issuing the agreement for the relationship, do you have enough in your agreement to protect yourself against late payments? There are a few ways to handle this. I usually recommend building these types of clauses into your template client agreement. 

1. First, is your payment provision clear? Do you get specific and state when payments are due and what the process will look like? 
2. Next, do you include a late fee to deter late payments? And, if payments are late, do you add the late fee to the invoice? 
3. Next, when, during the course of providing services, do you require payment? This is one of the best ways to help guard your business against late payments. For example, if you currently ask for payment upon completion of the services, could you switch this to ask for deposits or prepayments?
   1. For many companies, asking for a deposit is standard. For example, they may require a payment of 25 or 50% prior to starting the services. 
      1. For some companies that work on an hourly basis, they usually don’t think to request a deposit, but you can request the deposit and then bill against the amount. You can then ask them to replenish the deposit when you’ve depleted the amount that is there. 
   2. For prepayment, this works well for retainer clients or those who you work with on a month-to-month basis. 
      1. For example, if you have a client who pays you $1,000 per month for a set of services, rather than billing them upon completion of the services, require payment prior to starting. Then, each month will be paid prior to the start of services for that month. That allows you to ensure you are being paid for the work you are about to complete. 
4. Next, do you have the right contact information for payments? Depending on the size of the company you’re working with, you may be paid by their finance department, rather than by the person who you contact regarding the services. In your agreement or as part of your onboarding process, ask who the contact should be for questions about payments. 
   1. Simply having the right billing contact can help you cut down on the amount of time to receive a payment since other members of the company won’t then have to review and forward the bill to the appropriate person. 
5. Next, include a process that allows you to stop work if there is a late payment. This may be something simple like stating that you reserve the right to stop services in the event of a late payment. 
6. Last, don’t transfer ownership of the services until payment is received. This might not apply to all types of businesses, but if you are a creative, like a website designer, you can state that the client will not receive ownership of the content or the right to display it until payment is received. 

If you are not issuing the contract, you can still make requests for the provisions I just discussed. 

And, if you aren’t issuing the agreement, make sure you carefully review the payment provisions. Is it clear what you need to do to get paid? What actions do you need to take, like sending an invoice, to get paid? Are the due dates clear? Are you requiring a deposit prior to starting work? 

Remember, you can always request changes if there is an aspect that you don’t agree with. If the client says no, then you can consider if it makes sense to move forward. 

This covers some easy ways to you proactively plan against late payments within your agreement, so now, let’s shift our focus to what to do when a client pays late. Because, even with a perfect agreement, you may still deal with late payments. 

Handling Late Payments

First, check the agreement and make sure you followed the terms. If you were not the party that generated the agreement, you may think the payment is due before the time listed in the agreement. Or maybe you listed something on the invoice for a due date, but it doesn’t match what is in the agreement. 

Be sure to check the agreement and verify exactly when the payment should be received. Sometimes, the late payments are as simple as a failure to match the invoice and the agreement. 

Additionally, when you are reviewing the agreement, confirm you followed the payment protocol listed in the contract. Did you send the invoice to the appropriate person? Should you have done anything differently? 

Touch Base with Your Client

Once you’ve reviewed the terms and you know for sure you did everything required under the agreement, it’s time to move to the next step, which is to touch base with your client. 

If you’ve worked specifically with one person, reach out to them to ask for the status. If your primary method of communication was email, try an email first. Here’s a sample that you might try: 

Dear Person, I hope you’re doing well. I’m so pleased with the results we achieved on the project and it was a pleasure to work with you.

Based on the contract, I sent an invoice dated XX and payment was due on YY. The payment is now a week past due. Please let me know when I can expect to receive the payment.

At this stage, keep it friendly. The check could easily be in the mail. You know, if it’s a company that still sends checks. Additionally, if it’s not yet processed, someone from the company could have been out-of-the office dealing with an emergency. You don’t need to start the first email with a super confrontational tone. 

When you start dealing with communications about late payments, I strongly recommend tracking whether or not the recipient has opened it. There are free options, like the free plan on Boomerang for gmail. Yesware is also a popular paid option. 

Now, here’s the hard part, you need to be patient and wait a reasonable amount of time. I often recommend sending more than one email just in case it got buried in someone’s inbox. 

Escalate Your Outreach 

If after a reasonable amount of time and attempts, you still haven’t heard anything, it’s time to escalate your outreach. 

Is there someone else that you can contact within the company? While you may be working with a particular person on your services, if you aren’t getting a response, it’s a good time to investigate other people who may be able to help.

I once had a client who was frustrated with a late payment and it was later discovered that her contact had left the company and the emails weren’t being actively monitored. So finding an alternate contact was all it took to get the invoice paid. 

If you have information for another contact, definitely reach out to them. If you don’t, check the client’s website or LinkedIn to see if you can find someone who works in the finance or accounting department. They may be able to give you an update even if it isn’t the person you were working with directly. 

Next, this is everyone’s least favorite step. I recommend making a call. So, just in case you get to this step, make sure you have a phone number, in addition to an email, as part of your intake and client records.

I know that making a call isn’t always popular if you usually do all of your business via email. However, this is a time when it definitely helps to pick up the phone. Emails may get lost in someone’s inbox, so a call can serve as a good reminder that they need to follow up with you.

If you still haven’t gotten a response, it’s time to do one last email with a firm due date. Here’s some sample wording:

Dear CONTACT,

I’ve reached out a couple of times recently to inquire about the status of my payment on the X project. I emailed on and list the dates. I also called to connect with you on and list the dates. Please provide an update on the status of the payment by no later than [give date].

I typically recommend giving them a minimum of 3 to 5 business days for a response. Just in case they have to do some internal follow up. My personal preference is 7 to 10 business days.

Next, it’s time to send a letter and make sure you can track the delivery. Send either a certified letter or something through UPS or Fedex that will give you delivery confirmation.

The letter will be similar to the last email that you sent. You want to include the following: 

• Introduce the project you worked on and advise that all work was completed
• Provide details about the payment and contract. (e.g., you were invoiced on XX and, pursuant to the contract, payment was due by YY.)
• Outline the attempts to contact. Provide a list of the dates and individuals that you attempted to contact.
• Provide a due date
• Advise of your next steps if payment isn’t received

To ensure that you are compliant with collections laws, do not threaten them with an action that you don’t intend to take. In other words, don’t say “If I don’t receive payment within 30 days, I will be forced to file a lawsuit,” unless you plan to sue. This episode isn’t a deep dive into collections law, but I will include a link to the Fair Debt Collection Practices Act, also known as the FDCPA, in the show notes. Section 807 of the FDCPA covers the type of false or misleading representations that you cannot include. 

If you are thinking about skipping the letter, I would reconsider. Throughout the course of my career, I have been surprised how some late payers will respond to nothing, but that final letter will move them to make a payment or to at least make contact. 

Collections and Lawsuit

But, what happens now if you still don’t hear from them? Usually, you need to decide whether or not to send it to collections or file a lawsuit.

You can consider sending the matter to a collections agency. Keep in mind that a collections agency will typically keep a percentage of any amounts they collect, so you may not be able to recover the full amount. (Although if your contract says you can recover the cost of collections, you may certainly try to recover any associated costs.) 

Additionally, you may be able to file a lawsuit to collect the sums that are owed to you. Depending on the amount of money owed, you may be able to file in small claims court, but this amount varies by jurisdiction. 

However, before you consider this step, check your agreement. Did you require mediation or arbitration for all claims? This could impact your ability to file a collections case. 

Once you obtain a judgment, you can then work on executing the judgment. This can be a difficult and cumbersome step, so you may not want to take this step unless it is for a large sum of money. 

If you aren’t sure what step to take at the end, this is probably a good time to consult with your attorney to discuss the pros and cons of collections vs. a lawsuit. 

Action Steps

Now let’s talk about today’s action steps.

1. First, does your contract help protect you against late payments? If no, are there changes that you can make? 
2. Next, make sure you get all of the relevant information when you sign a new client. This includes email, phone number, and address so that you can conduct follow up as needed. Remember to ask for a secondary contact for billing questions, if needed. Either make this part of your contract, or include it as a step in your onboarding process. 
3. Next, if you have to begin the late payment steps that I just reviewed, keep a document that outlines what steps you have taken. If you get to the point where you have to send a letter, it’s a lot easier if you have been tracking the dates of your emails and calls. 
4. Next, if you do make contact and the client claims financial difficulties, you can consider if a payment plan makes sense. If you do this, be sure to outline the terms in writing. 
5. And, last, as always, if you aren’t sure how to handle a late paying client, please reach out to a lawyer. 

Thanks for joining me for today’s episode on how to handle a late paying client on the Simplifying Legal Podcast. I hope it was helpful, but I also hope you never need to go through the process of collecting on late payments. Please subscribe if you haven’t already. 

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Thanks for listening and we’ll continue Simplifying Legal on next week’s episode.