Avoiding Collections Problems in Small Business
Ensuring Your Home-Based Business Gets Paid
Oct 2, 2009
Whenever a service business takes on a new client, there is the risk of non-payment. For a small business, especially a one-person operation, every little bit counts. So collecting the money that is owed is crucial to success. There are a few things that can be done to help ensure that payment is more likely.
Working off of a Retainer
Retainer fees are deposits on future work. If the work isn’t done, then the money has to be given back to the client. Many professions use these – lawyers are most famous for them. But accountants, consultants, and even some contractors are starting to use these. If a retainer is paid, make certain that it is well documented, and allocated properly by the bookkeeping/accounting personnel. It is also a good idea to have a separate bank account to keep retainers in. This allows that the account can be more easily tracked, and if there are ever any issues, then the outstanding retainer fees are quickly available for refund, if needed.
Billing Clients Immediately and Accurately
Clients appreciate knowing how much they are spending. Estimates are often used in consulting work, including some accounting. It is always best to be accurate in these estimates and to invoice a client when work is delivered. This ensures that they do have the amount they owe, and can address payment immediately.
Offer Discounts on Early Payment and Penalties on Late Payments
Most businesses offer Net 30 terms to their clients. Many service businesses shorten this to Net 15. These terms mean that the client has either 30 or 15 days from the date of the invoice to pay the bill without any penalties. However, many home-based business owners do not charge penalties. This is a mistake! Penalties can be enforced, so always clearly state them on any invoice, as well as within contracts. Stating the terms in a contract is always best! Use whatever interest rate seems fair, or choose an industry standard. For most service companies this is around 18% per annum, compounded monthly.
Give clients an incentive to pay early, offer them a discount when payment is received within 5 or 10 days. Discounts don’t have to be large; usually a two or three percent discount is plenty. Some service firms offer as little as one percent discounts, while other might offer slightly over three percent. Again, be fair. And don’t over-discount to the point where it hurts.
Always Enforce Collection
When customers are late, pursue them! This is usually done through sending statements with follow up phone calls. Do it every month, and once the client goes over 45 or 60 days, call weekly, even daily. And if a client is really late, more than 90 days, then it may be best to sell the debt to a collection agency. That will lower the amount collected, sometimes to as little as 20% on the debt. But it’s better than collecting nothing.
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