With TSheets and Funding Gates teamed up to help you get paid faster from your clients, we’ve covered many things, from creating a stellar credit process to decreasing the amount of time it takes to get paid. Unfortunately, though, no matter how many precautions you take or best practice tips you apply, you are going to confront some customers who are just complete and total deadbeats. These are the customers that you never see coming, but end up, no matter what you attempt internally, never responding to your payment requests. When you find yourself dealing with a “deadbeat”, it’s important to get outside help, upping your chances to see at least part of the the money you are owed. Below, we have some of the best options out there for dealing with difficult customers.
1. For Those in Construction, File a Lien – If you are a business who is a construction contractor or supplier, Mechanics Liens are a special instrument just for you. Essentially, they secure your claim by using the property as collateral for debt. A lien also allows you to skip over whomever you had the initial contract with and seek payment from other parties (like the general contractor). Filing a lien will make your debt secured (like a bank). Banks almost always get paid, and with a lien filed, it puts your business in a “collectible position” too.
2. Call a Lawyer – A great way to motivate deadbeat customers to pay is to have an attorney reach out to the customer. Now, before taking this action, it’s important to perform a cost-benefit analysis. Lawyers are expensive, and it’s important you make sure their fee doesn’t exceed the amount you are trying to collect. If you find it financially makes sense, then definitely consider a letter from an attorney. As Justin Tenuto from Rocket Lawyer says, “Sometimes, a professional correspondence from a practicing attorney will motivate your debtor to pay up. After all, debtors don’t want to end up before a judge, explaining their motives for not paying you.”
3. Small Claims Court – Another option to consider is taking the customer to small claims court. Now, only certain financial amounts can be accepted in small claims court, but this amount varies state by state, so be sure to check what the limits are within your state. What you’ll find is that, many times, just the notification of a court date can motivate a customer to pay. However, be sure that you have your entire business agreement in writing (like we discussed in Creating a Credit Process That Works), as that is what will make your trip to small claims court the most effective. But similar to working with an attorney, it’s important for you to consider cost when going to small claims court. It will take some of your very valuable time, and if it’s only a small amount, it might not be worth it.
4. Working with a Collection Agency – If a lawyer or small claims court doesn’t make financial sense, or you’re just ready to get this customer off your hands, working with a collection agency is your next best shot. Although it might be nerve wracking to work with a collection agency, as you’ve probably heard some horror stories, you have to realize not all agencies are bad. It’s all about performing the right due diligence on an agency. You want to know not only what their recovery rates are, but also how they will treat your customers. The other thing to consider is that you only pay if they collect. It’s worth it just to see if their successful. After all, it’s better to have some of the money you are owed rather than none. Be aware, though, that their fees run high. Sometimes you can end up paying them 30% – 50% of the invoice if the agency is successful.
5. Write It Off – If you decide to completely give up on chasing a debt, then you should write off that receivable. However, don’t immediately skip to this step. Be sure you’ve exhausted all your options (an attorney, collection agency, etc.) before giving up on the debt. Why? Writing off debt actually has a pretty big impact on your finances. In fact, you can use this calculator to see how many additional sales you would need to make in order to compensate for a bad debt write-off. That number can be a bit daunting, so think carefully before taking this step.
One of the hardest things you will ever face in business is a deadbeat customer. Delinquent accounts are incredibly frustrating and can certainly leave you feeling hopeless. If you find yourself in this position, remember you have options. Don’t be afraid to try them! Be sure to join us next time we’re on the TSheets blog, as we discuss how you can use technology to manage and apply all the tips you’ve been learning along the way!