When you're in business for yourself, a lot of your time is spent trying to negotiate higher pay, raise your prices, reduce your costs, and otherwise find ways to improve your business economics.

And if you're in business for yourself, you might also spend a lot of your time trying to bring in the money you've been making -- at least, money you've been making in theory. Companies regularly take their sweet time, your importance to clients drops radically once you deliver what they want, and then there are the shameless slimes that ignore one statement after another and keep your money in their pockets.

I've been in this type of business for a long time, have seen my share of difficult customers, and yet only lost a payment once, and that was when a company declared bankruptcy. (Even then I ultimately received more than half of what I had been owed, although it took a couple of years, because I followed up and filed the necessary paperwork.) In that time, I've learned many lessons about how to make sure you get paid. Here are some that, when regularly applied, will help improve your situation over time.

Choose the right client

I'm sure this point grates on many. You don't realize there are problems until after they show up. But some entrepreneurs seem to largely avoid the bad payers while others have issues with one client after another. It's important to do some background work, because the better the client, the better your cash flow.

Recognize that there are broad classes of clients. Larger companies can often be slow in payment, but are typically good for the money. Mid-sized companies can also be good for the money, and probably have assets that would make legal action and collections possible, if necessary. Smaller companies and individuals are where the problem can creep up. But in any case, no matter what the size of the company, check their reputations, and not just in a couple of Google search pages. Look for lawsuits that involve the companies or principles. Read through sites where people might describe experiences dealing with the company. If they treat customers or investors badly, what do you think they're going to do to contractors? Talk to colleagues who may have had run-ins. If the work has a high enough value, consider paying for a D&B credit report on the firm to see its payment history.

Square away your contract

Service providers are often so anxious to bring in business that they don't take care of the mechanics, including contracts. You want a document that spells out the relationship, what you will provide, what they will pay, and when all this happens. You want a lawyer to create a general document that you can then tailor for a specific client when necessary. Here are some clauses I've found helpful, in addition to the usual ones:

  • If the client doesn't pay within 90 days -- that is, really late -- you have the option to take any legal options to collect and they agree that you will add those costs to the bill. Why should you take it on the chin because they tried to screw you over?
  • Late payments past 30 days start accruing interest every month. Again, why should you be effectively paying interest in time-value of money and possibly in credit card debt to float what they haven't delivered?
  • No ownership of any IP changes hands until you have received the final payment and it has cleared. This is a potentially big lever that you want in your hands.
  • Set deadlines for acceptance of work at milestones. The client has a specific reasonable amount of time to get comments back to you. If they miss that deadline, they technically accept the work done. (I came up with this clause when someone I knew decided to stretch out a payment he owned me by not actually responding to the draft.)

Be serious about being paid

This is a big factor among many freelancers and contractors that I've seen. You need to invoice on a timely basis. (I've been stunned when I heard from clients about freelancers who have to be nudged to send an invoice. Who does work and then is indifferent about asking for their money?)

Have real accounting software to generate your invoices, not word processor documents or simple emails or texts. The program will be able to send what you need in any regular format and, much better, will track how long it's been since you've been paid through a receivables aging report. Regularly check your accounts payable lists to see the status of all payments.

Don't wait overly long to get in contact about late payments. If your terms with someone are 30 days and 35 days go by, send a polite note checking in. Talk to people in accounting who can tell you whether your contact even bothered to send over the paperwork. (I once had a large client where the contact held onto big invoices. It took speaking regularly with the accounts payable representative to learn what was happening.)

For heaven's sake, if a company isn't paying you, don't keep doing work for it. The work you are booking at that point is a fairy tale to make you feel better about how much revenue you're making that month. But if they aren't paying, the money is a fairy tale. You're taking up your valuable time working for free.

Keep copies of all correspondence. Don't delete even routine emails from clients. Set up a folder system so you can have all correspondence together in one place. Not only does that let you track the entire transaction if you eventually have to see a lawyer, but it helps you stay on top of the work in general.

Be ready to do something

Attitude and intent are vital. You have to decide that, without gratuitous anger, you will make sure you're paid. There have literally been a couple of times, after companies gave me one excuse after another, that I called and said, "I'm driving over tomorrow and you had better have a check in hand." At such points, don't worry about ultimately alienating the client, because they've just proven themselves as bad risks. You want to get paid and you don't need to tie up more time for what becomes charity work.

Know a lawyer you can use if necessary. That might have to happen in the client's home city to be effective, and here's an example why. I had done a lot of work in a short amount of time for a mid-sized company. It had made one or two payments and then stopped. As I later learned, they were trying to stiff everyone. The company had a New York headquarters that would ultimately move to another state, but still had a presence in the state. I knew a lawyer who took the case on contingency and I sued.

The company negotiated in bad faith, trying to ignore everything, claiming that the work wasn't up to par. I had all the correspondence (see the point above about keeping all correspondence) that showed praise for and acceptance of the work, so that excuse was brushed away. Then the company hired a law firm to negotiate a settlement. We came to an agreement only for them to try and back out. Except, my lawyer was as obsessive about keeping records as I am, so there was an email exchange detailing the agreement to terms. In the process they had effectively agreed to the settlement.

My lawyer, who was in a borough of New York City, went to the local court clerk and got a default judgment. Even then the company tried to ignore things, so I had my bank look up the records of the deposits I had made (did you know your bank keeps records for some time of all the checks that you deposit?) and the lawyer used that information to freeze the company's bank account. You might be amazed at how quickly the settlement money arrived.

There is no way to guarantee that you'll never have a troublesome client. But if you take the right precautions and use the proper business procedures, the chances of losing what you are owed drop dramatically.

Published on: May 24, 2016