[This article was written by Kim Phillipi.]
One of the biggest headaches in running a business of your own is in getting all your customers to pay on time. When you run into collection problems, it can put your own finances in jeopardy and force you into a tight spot. By practicing techniques for preventing payment problems and for reacting to these circumstances when they do occur, you’ll be better able to avoid many of these headaches.
Demand Half the Payment First
Before you even begin a project or included within your terms with your estimate, notify the potential customer that you expect half of the payment in advance. Primarily, this money will be needed to cover your expenses for starting the job, which will encompass the materials you’ll need and the employees you’ll have to devote to the project. Without that good faith payment, you have to burden that expense on your own with no guarantee that you’ll receive payment at all.
If you don’t require half of the full estimate, at least demand 30% of the total estimate. You should agree upon these terms in advance and make sure the client or customer knows this initial payment is due, before you begin planning the project. In negotiating these terms, also ensure your customer understands that the rest of the payment is due as soon as the work is completed. Making your terms clear in advance and reminding the customer as the job nears completion can help you receive your payment in a timely manner.
Payment Terms Can Harm You
When invoicing your customer for the final payment, make it clear that you won’t divide that payment up into a long-term schedule. While you may have a soft heart and want to work with your customers, this can ultimately lead to not receiving full payment at all. In many cases, the more time a customer is given to pay, the less likely they are to pay the full amount owed.
The largest problem in this area comes with end of month billing cycles or a 30-day payment schedule. In these cases, business owners see those due dates come along and still don’t receive payment. By sticking to your guns and demanding payment upon completion, you’ll increase the likelihood that your customer will settle up. You can even utilize an app or send an email to notify your client the job is being finished and full payment is due on the final day of completion prior to leaving the job-site. This is the best method, because it provides a visual reminder that the payment is required and they need to make arrangements to get you paid before final completion.
Document Your Terms
Any paperwork you provide to your customer should clearly state your down payment requirements and that final payment is due upon completion of the work. Any invoicing or estimates you provide related to the job should contain this information, as well as spelling out the penalties for failing to pay on time. For instance, letting your customer
know that failure to pay may also result in reclaiming your work. It is also best practice regardless of whether you use paper or electronic estimates to have your customer sign the estimate with the included terms prior to initiating the project. This protects both you and your customer to make sure everyone understands the terms of the contract and invoicing.
Where the work can’t be reclaimed, you may prefer to charge a late fee. The paperwork should detail how late fees will be applied, including the rate of the late payment fee. Typically, this should be a percentage of the total amount owed. Here is a formula with a practical example provided below for a project worth $5,000 and a late fee of 12%:
- Amount Due x (Annual Percentage / 12) = Monthly Late Fee
- $5,000 x (0.12 / 12) = $50/month late fee
Of course, these exact figures won’t work for every business. Depending on your circumstances, you may want to plug in different values until you come up with a more reasonable late fee for your type of product or service. The late fee should cover the expenses you’ll be incurring due to the customer’s nonpayment and should be enough to cause the customer to “feel it” in their pocketbook. This can push the customer to pay up much sooner. They will want to avoid additional penalties, if you can make those penalties painful enough.
The most important thing you can do for your business, as far as receiving owed payments, is to document everything. By maintaining written records of what is owed, what has been paid, and the penalties charged for late payments, you can better protect your position. This ensures your customer is never left in the dark in terms of what is expected of him or her. It maintains a steady flow of communication that will help compel the customer to pay up.
In some cases, the customer may lapse in payments or refuse to pay at all. When this occurs, you may be forced to take legal action. By having documented the project, your charges, and what you have received, a court is more likely to force the customer to pay the debt. Documenting your policy of late fees and having your customer sign an acknowledgement that he or she will be subject to those late fees for nonpayment, you’ll also have proof of those terms to submit to the court. This can help you recover the fees in addition to the full amount owed and allow you to finally settle your accounts.
Kim Phillipi is currently the President and owner of Building Science Academy, LLC, a startup company that was formed in 2009 operating a construction business, GreenFit Homes, and an app development company for the construction business, JobFLEX. JobFLEX was developed due to a lack of easy to use estimating and invoicing apps in the construction industry for small and medium size contractors. Kim currently oversees Finance, Marketing and Business development for GreenFit Homes and JobFLEX.