How to Collect from Customers Who Don’t Pay

January 10, 2013 | By | Reply More

You’ve worked non-stop to develop a client’s web site. You delivered the baby clothes you’ve created to a retailer. Or you have put up the banners of an advertiser for 30 days. You wait for the payment, but nothing comes. What are you to do?

A non-paying customer is one of the worst nightmares of a small business owner. Where every cent counts, a delayed payment (or none at all) could wreak havoc on your finances. Not only that, it eats up a lot of your time that could be spent instead in developing and growing your business.

Before handling the account receivable to a collection agency or a lawyer, here are some steps you need to take to protect your business from slow or non-paying customers.

1. Promptly send out bills.

The sooner it gets to the customer, the greater the chance that you will receive the payment on time. Make sure that your bills includes all the relevant information of the purchase, including the goods or services rendered, the price itemization and the dates purchased. Even include how the order was placed, whether by phone, fax, in person or on the Internet. The more details you include in the bill, the harder for the customer to dispute your charges. In the event that the customer disputes the amount owed, be sure to respond promptly, in writing. Otherwise, you can lose some rights under various credit laws.

payment online

2. Create a system that would allow you to monitor payments that are due daily.

Make sure that you are aware of any signs of problems such as slower payments, failure to return calls and bounced checks. If you use Quicken, Quickbooks or any other software packages, customize them so as to alert you when payments are due. If you are not using any of these software, create these two spreadsheets using Excel or Lotus:

  • Aging of your Accounts Receivables. The form should include: Customer Name, Contact Person, Phone, Total Amount, then check whether the account is 0-30 days due, 61-90 days due, or over 90 days due.
  • Compile all these information in a monthly Accounts Receivable Customer Statement form, which will include: Invoice Number, Invoice Date, Product or Service Description, and the amount that is 0-30 days due, 61-90 days due, or over 90 days due.

3. Send follow-up reminders promptly.

As soon as an account is included in your past due column, even if it is only 5 days, be sure to send follow-up reminders immediately. Stamp a big “Past Due” on the cover of the notice. The longer a bill is not paid, the harder it is to collect payment. Be sure to have a set of demand letters drafted, with increasing level of firmness depending on the length of payment delay.

4. Visit or call the customer or accounts payable department.

Discuss with them the situation, ask for your money, and inquire what can be done to speed up payment. If the customer agrees to see you, chances are you will leave with at least an explanation or excuse as to their non-payment. Strive hard to leave the meeting with a check or written assurance that your bill will be paid. Insist on a firm timetable for the payment, and how the payment will be made — whether hand-delivered cash, a check via a messenger service or whatever the case may be.

5. Have a plan of action if the customer is experiencing financial problems.

If the customer has financial problems, consider extending the time for payment but make sure that he signs a promissory note that will commit him or her to a periodic payment plan. You can suggest to customers experiencing a cash-flow shortage to charge the amount due to their credit cards. If you have a merchant account, getting customers to pay with their credit cards can go a long way in reducing your receivable problems and eliminating default risks. It will allow your customers to pay the balance in installments.

6. Once a customer becomes a problem, consider stopping any future sales and discontinue providing credit.

If you are dealing with a big company and their accounts payable department is turning a deaf ear to your demands for payment, call the buyer at their Purchasing Department and tell them that any new sales to their company is stopped. You may get a more favorable reaction from the buyer than the accounts payable clerk. Even if a compromise is reached, tread carefully in providing the customer a new line of credit. A better approach is to demand cash payment on delivery on any new sale.

7. When dealing with a non-paying customer, be sure to conduct yourself in the most professional and courteous manner possible.

If you can’t resolve the issue, leave or hang up the phone to avoid charges of harassment. You can be hit with a double jeopardy: the customer doesn’t pay but sues you for harassment! Space the timing of your calls, maybe a day or two later. And of course, continue sending out your collection letters.

8. Know when to throw in the towel ­ e.g. customers declaring bankruptcy — and write off the debt.

A small consolation: bad debts are tax deductible. If you want to get the money the hard way, you have two options: get a lawyer, or hire a collection agency. Your customer may view the letter from your lawyer more seriously and be more inclined to pay. If this still doesn’t work, you can get a collection agency to get your money for you, at a cost of about 15-40% of the amount collected.

The best advice: get the payments first before you deliver.

Recommended Books on How to Collect Payment:


George Rodriguez

George Rodriguez is a writer for An entrepreneur with experience in running several businesses, he writes on various topics on entrepreneurship and small business.

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Category: Financial Management

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