By Dean Kaplan, CEO and President, The Kaplan Group
Most independent businesses have very tight margins for cash flow. A late payment from a customer can make it difficult for you to buy the product necessary for you to create a new shipment, or to hire necessary staff. In fact, unpaid invoices are one of the leading reasons small businesses fail. The homesteading movement was built on the idea of being independent and self-sufficient. It’s natural that as a homesteader and a business owner you would want to be as independent as possible with your business. If you are concerned about unpaid invoices, I have suggestions for how you can protect your business before reaching out for professional help.
Credit Reports and Applications
The best way to handle an unpaid invoice is to avoid having one! When you first start a business, you spend so much time pursuing new clients that it’s easy to forget that not every client is a good client.
If you’re providing products or services before being paid it’s important that you have new clients fill out a credit application and that you run a credit report. Doing so can help you weed out risky or unethical customers. A credit report often reveals information about your clients that you may want to consider before shipping product. For example, depending on what you learn in a credit report you may wish to request a larger deposit. A credit application is also a good way to ensure that you collect all the necessary contact information for following up on late or unpaid invoices. You always want to make sure that you have contact information for more than one person at a company as you never know when someone will become unreachable.
You do not need a lawyer to create a good credit application as there are many available online. There are however certain terms that you should make sure are included in your application. One of the more important terms is a Personal Guaranty. Most companies are set up so that the owner is not personally responsible for company debt. A Personal Guaranty makes an owner responsible for unpaid invoices. Including a Personal Guaranty clause in your credit applications may mean that a business owner facing financial difficulty will move your invoice to the top of the “To Pay” pile.
Credit reports are fairly inexpensive to run, especially when compared to the cost of an unpaid invoice. It goes without saying that if you are the one filling out a credit application you should read it carefully to make sure you agree with all the terms and conditions included.
Invoices, Contracts and Payments
Good record keeping, well-written contracts and timely invoices all make it easier for you to get paid. Living off the grid is a hallmark of homesteading culture, but it does not work for running a profitable, modern business. You should have a written contract for all clients, even if you are swapping goods or services. In addition to accepting cash and checks, it is important that you make it easy for clients to pay you electronically or by credit card. Any business should have a website with a secure payment portal. This will help those who want to pay quickly, and avoid excuses from clients who are stalling. Although the prospect of a processing fee may annoy you, any processing fee you pay for electronic or credit card payments is small, especially when compared to the cost of collecting on an unpaid invoice.
Asking for Payment
Assuming you have sent your invoice promptly, you should never be embarrassed or ashamed to ask for your payment, even if it is only a day late. If you allow people to pay you late, they’ll learn that it’s ok to pay you late. I recommend starting your collection process with a phone call. It’s important to make the phone call at a time when you are calm and relaxed. It is also important to ask questions and gather information, but not make accusations. Invoices can go unpaid for any number of reasons, many of which have nothing to do with you or your company. The purpose of the first phone call is to inform the client that the payment is late and to try and gather information about why it is late. When calling, pay attention to warning signs that the company may be in trouble. Is the phone answered in a professional manner? Is your contact complaining about an increased workload due to layoffs? Do things generally seem “alright”?
After the phone call, you should follow up with an email restating the amount owed and any information that you learned in the phone call. This will help create a paper trail. A paper trail can prevent the customer from later claiming that he did not receive the product or that the product he received was damaged.
You should continue to follow up on a weekly basis. If you decide to temporarily accept a partial payment, make sure to note in writing that the payment is only partial and the balance is still owed.
When you started your homestead-related business, you probably found that no matter how independent you wanted to be, there were certain areas where you really needed professional help. You may have hired a lawyer to help you incorporate, or a programmer to build your website. While you can do many things to protect your business from unpaid invoices, you may eventually need to consult a collection agency. It happens to every business owner at some point. No matter how careful your research, how well written your contracts, at some point someone won’t pay you. When this happens, it’s important that you take action as quickly as possible. The longer you wait, the less likely you are to be paid.
A reputable collection agency will only charge you if they are able to collect. So, while it’s true that you will not get the full amount owed, you will save yourself time and effort, and likely receive more than you would have on your own.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.