Everyone expects to be paid for the services that they provide, whether in money or in-kind or by the method as described in the contract. Every business has some clients or customers who won’t play by the rules. The odd ones, who always make the job difficult. The ones who make the payments late or even better won’t pay at all! How disrespectful is that? This is a common problem that most firms face. It is a classic never-ending loop! One of the biggest problems faced by the financial department of many organizations. Handling these complaints is a messy job, and these late and non-payments have a serious impact on the running of firms. There can be many ways to deal with such non-paying clients that we will discuss in detail going forward.
What are non-paying clients?
Well, as the name suggests, a non-paying client is a client that refuses to pay his/her outstanding amount owed to the firm even after multiple reminders sent to them. These are the people who won’t pay their long-overdue invoices even after multiple efforts by the firm to reach them either by calling, emailing, or even reaching their place. If even after so many efforts, the individual is not ready to surrender the amount owed, then the company can take various extreme steps to get their payments like hiring a collection agency, going to a lawyer for seeking legal help by filing a lawsuit and many more.
How to handle non-paying clients?
There are many soft options that the firms can apply if a non-paying client comes on their radar. These are the steps that generally do not involve help from the legal department and can be tried by the firm itself. So, some of these hacks to try on are:
- Draw up a contract and state clear due dates: To avoid any confusion, there must be a legal contract in place with all the important details like when the payment is expected, the terms and conditions of the services, and the timeline for the completion of the work. The date of payment must be in bold, clear and simple language, and the client must be well aware of it. Every legal contract must have the following inclusions:
2. Revisions: If the nature of the work is as such that it requires constant revisions, so the limit to the number of revisions must be included in the contract.
3. Deadlines: The start date, the end date, the delivery date, specific milestones- all of these must be mentioned for any project in the contract.
4. Intellectual property: It protects the clients from any copyright issues as well as allows the firm to include the project in their list of works.
5. Exit Clause: One of the most critical section, where the grounds of termination of the project are mentioned if anyone (the client or the firm) decided to back down from the project.
6. Financial terms: The most important section, which safeguards the firm from defaults in payment. So, the late fee charged, money-back guarantees, discounts, partial up-front payments are all mentioned in detail in this section.
- Add on the late fees to the already uncleared dues: Directly threatening someone with consequences can have a reverse impact on the client, and they may further refuse to pay the dues. While some of the candidates may have a genuine reason for not paying, levying a late fee might tempt them to pay at the earliest if they do not want to face even harsher consequences.
- Polite reminders: Send reminder mails to the client as soon the due date is over, to make the client aware that the due date is over, keep the tone professional, re-emphasize the amount to be paid, the modes by which the payment can be made, the payment due date and any late fees added to the payment model.
- Call up the client: Reaching the customer through the phone is the next step. Here also, try and be professional and polite and ask the client of the reasons for not being able to pay on time and try to devise a solution together. Try to get the client to agree on a future date by which the payment can be made.
- Confront the client directly: The next step involves going directly to the client and having a talk face-to-face so that the matter can be resolved most efficiently. Try to reach a mutually decided date of payment from the client.
- Offer lucrative payment methods: Offering options such as payments in instalments by charging some nominal fees can be provided to the client so that the strain to pay such a huge amount can be eased on them.
- Stop any future services to the client: This is a smart option in which the firm stops providing any service to the non-paying client till they pay their dues. In doing so, they further save their own time and money by wasting them on a non-paying source.
- Hire a collection agency: Now is the time to go to a third party if the client still hasn’t coughed up the money yet. Usually, collection agencies charge a huge amount of fees, up to the extent of 50 per cent of the collected amount, so pre-analysis must be done if the entire process is worth it or not.
- Time to take out the big guns!
Can legal actions be taken against non-paying clients, and if yes, what can be done?
Even after so much pestering and reminders is the client is not ready to pay the dues owed to the firm, then the company has no other options but to resort to legal help. The legal contract that the firm draws up before the beginning of the project gives the firm the right to resort to legal means if the client fails to pay its dues. If the amount due is significant, then hiring an attorney or taking the clients to a small claims account or filing a lawsuit in the civil trial court will be a viable option. So, YES! Legal actions can be taken against non-paying clients.
- Send a demand for a payment letter: Before filing a lawsuit, a formal demand letter has to be sent to the client, which includes the reason for the client being in default, how much is the firm owed, demand for the payment by the specific date and warning for a lawsuit.
- Let the attorney do the talking: Get an attorney involved and seek his/her help on how to proceed further. A lawyer can give great advice on how to handle these kinds of sticky situation. Lawyers will also advise on where can the lawsuit be filed based on the specifics of the situation. Threatening the client with a lawsuit is generally scary enough for the client to pay back their dues.
- Going to a small claims court: Going ahead with the lawsuit, the first thing that needs to be decided is which court to go to. Small Claims court is generally the least expensive one, the least time consuming one and the best option. Most of the firms seeking to collect their debts go to the small claims court to take its help. Here, the process of dealing is simple enough, so most firms do not need to hire a legal attorney. There is a limit on the debt amount, which can be settled in the small claims court, which ranges from $2500 to $25000. If the client does not show up, then the firm wins the case by default or in case of a hearing. The result comes out on the same day.
- A Civil lawsuit: If the debt amount is larger than the limit prescribed by the small claims amount or the case is a complex one, then the firm can lodge a lawsuit in the civil court. These cases might last for several days and are more formal ones. The firm might also require to hire a lawyer to represent it in the civil court. The court fees, lawyer’s fees, the amount of time spent to get a ruling all of these factors must be taken into account before filing a civil lawsuit.
- Arbitration: Instead of filing a lawsuit, arbitration is a quick and easy way to get the payment from the client. It is overseen by an arbitrator and is much less formal, and the arbitrator’s judgement can be enforced like that of a judge.
A non-paying client is an unnecessary burden that most businesses have to bear. Taking legal actions against them can be taxing, costly and time-consuming. So, the best way to deal with them is to prevent having non-paying customers by doing a thorough background check before entering into any project with them. Dealing with non-paying clients is a difficult process, but it is a part and a parcel of running a business and hence, has to be handled tactfully.
