What to do when someone doesn't pay
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If you’re new to business then finance, keeping your accounts in order and making sure that money keeps flowing through your business can all seem a bit boring. There are always other more exciting things in your business you would rather be doing. But if you’ve run a business for a period of time, you will learn that these things need to be at the core of any business. As vegans, we don’t seem to like talking about the money side of business because, for many of us, we didn’t necessarily get into business for the money. We wanted a way to align our ethics with how we make a living. We wanted to take the skills we already had and use them to move the vegan cause forwards. But you cannot do that if you run out of money. Money is like electricity; if it runs out then everything shuts down. And if that happens then you cannot realise the dreams you have of making a difference with your business.
The core function of your business
As a business owner, you need to make sure that the money keeps coming in. Usually that will go without a hitch, you’ll do a job or you’ll provide a product and the customer will be happy to pay you for it. But every now and again it’s not quite that simple. Your invoice goes unpaid or you deliver a product and the money never turns up in your bank account for it. Sometimes the customer goes quiet and seems to disappear from the face of the earth, or sometimes they become very vocal and give you every reason under the sun why they are not happy to pay for what they have received and start asking for a discount. If you sell a product where the customer has to pay upfront, for example e-commerce where someone pays in full before you even ship the product, then you’ll avoid many of the problems of customers not paying. You will still have to deal with returns and refund requests, but you’ll already have someone’s money in the bank so at least you’re going to be more in control of that situation. But if you’ve delivered a product, or you’ve done a project for someone and sent off the invoice and then you hear nothing back – what do you do? How do you resolve that situation, knowing how much vegans hate conflict, and what do you do to avoid it happening again in the future?
This is a lot more common than you think. If so far in your business journey you’ve had no issues with your customers paying you then you have been extremely lucky or you’ve not been doing this very long. From experience, when someone doesn’t pay your bill on time it’s often because they simply can’t – they don’t have the money. Someone was late paying them, or a job didn’t come in that they were relying on or something’s gone wrong in their business. The problem though is that businesses are run by people, and people are irrational and emotional things that react in different ways when they receive a bill they can’t pay. Some people panic and use avoidance, so they do everything they can to avoid talking to the people they owe money to. Some people outright lie, they say they never received the invoice or sometimes even say they never received the product. And some people just string you along for as long as they can, saying they will chase it up with their accountant, or that they will pay next month.
But there are lots of things you can do to protect yourself against non-payment and retain a good relationship with your customers. Business is an ancient activity; we’ve been exchanging goods and services for thousands of years so as you would expect, there are already lots of best practices and even laws in place to ensure that you get paid for what you sell. However, the opposite of that is also true. If you are of a certain mind and run somewhat of a sharp practice, then there are also lots of ways to avoid paying for products and services. If you cannot prove that someone actually placed a legally-binding order with you, then that person has no obligation to pay you. You can build a website for someone, or you can deliver a case of your finest product, and if you cannot produce a legally recognised paper trail showing that person entered into a contract with you, then there’s very little you can do to get that person to pay you if they decide not to.
Setting up the business basics to protect yourself
Some people know exactly how the law works. They will take advantage of businesses that do not have all the right procedures in place: freelancers who just start on a project without getting a contract in place or a purchase order from a client; companies that operate without terms and conditions of sale in place. Some unscrupulous people will order services and products from these companies having very little intention to pay.
So first we need to make sure that our businesses operate in a way that protects ourselves. An unpaid invoice can be the end of your business, especially if you are a small company that relies on the revenue on each and every job. In return, it may put you in the position where you cannot pay your own staff and suppliers. So it is vital that you find out what you need to have in place in your country or region to make any order a customer places with you legally binding. Usually, this means having a contract in place that is recognised in the law of the country in which both you and your customer operate. This might be a purchase order issued from the customer or it might be a signed sales form from someone agreeing to abide by your terms and conditions. It should say what goods or services are being ordered, how much they are going to cost and have details on how and when they will be delivered. It should identify who in the business authorised the order and the date of when they did so.
At the centre of this agreement should be your terms and conditions, or your ‘terms of trade’, and proof that your customer has read them and agrees to them when they place their order with you. This can be something that seems really complicated, and we always think of those pop-up boxes full of legal text that pop up and you just click ‘agree’ without reading through them, but your terms should actually be in very clear language and make perfect sense when someone reads through them. They will say on what timescale a customer agrees to pay you, they will state who owns what you have produced before payment is made and it will also set a legal framework for the order.
Ideally, you should get both the words on your order form and your terms and conditions drawn up by a business lawyer, especially if you are a larger business or your orders are of a high value. Some local lawyers offer terms and conditions packages to small businesses for just a few hundred pounds. But there are also a lot of free resources and templates online that you can use to create your T&Cs, just make sure you read through them and that they are relevant to your business. If you run a food delivery business for example then there’s no point having a line in your order terms saying that all copyright for your work remains with you until the customer has paid, no matter how much of an artwork you think your baking is! Terms and conditions should also be written in plain, simple language. If you read through your terms and they are full of legalise and you have no idea what they say, then there’s little chance your customer will understand what they are agreeing to either.
This is part of being a business owner, educating yourself on all the things you need to know to successfully run a business. So find out what should be on a sale order or a purchase order in your part of the world and make sure you get your customer to sign it (digitally or physically) before you take on a project or sell someone a product. Most countries have organisations dedicated to supporting businesses, either government-run departments or independent bodies, who will have some good online information about creating order forms and terms of trade. And if someone doesn’t want to sign your order form, then let that put you on your guard. Remember, there are a lot of people out there who know the law and will use it to their benefit and your disadvantage.
If you read through your terms and they are full of legalise and you have no idea what they say, then there's little chance your customer will understand what they are agreeing to either.
Finding out why your invoice hasn't been paid
So you have all your paperwork in place, you finish the project or deliver the product and then… nothing. The weeks go by, no payment lands in your bank account, what do you do? The first thing to do is to find out the facts. First, you need to check if the invoice has actually gone through. If you are working with a larger company, a quick phone call to their accounts department with the invoice number and your company name will tell you if the invoice is on their system or not and they should also be able to tell you when it’s been scheduled to be paid too.
Regardless of if you have a payment due date all over your invoices, some companies will simply pay all their suppliers on set terms and there’s not much you can do about it. This might be 30 days, it might be 60 days or it might even be 90 days after the invoice date. Even if they agreed to your terms and conditions when they ordered, if a large company has set terms for paying all its suppliers there’s very little you can practically do about it except wait until the scheduled payment date rolls around. You can complain, you can point out that they agreed to your payment terms, but unless you can get a director to intervene and make a special exception, then you’ll need to work that delay in payment into your cash flow forecast.
You might also be surprised to call the accounts department of a company and find that they have no record of you or your invoice! It might be that the organisation has a set procedure for setting you up as a supplier, and the person you’ve been working with didn’t know or completely neglected to tell you about it. Or it might be that the company only accepts invoices sent to a specific email address that automatically puts the invoice on their system and you instead sent the invoice to your contact who left it sitting in their inbox.
It may also be that you left some crucial information off your invoice so it never got approved – such as a purchase order number that they could match in their database or your company name on the invoice didn’t match the company name they have you set up as. So it’s worthwhile, especially if this is your first job with a company, to follow up a week after sending your invoice to make sure you’re set up as a supplier and that your invoice has successfully made it into their system and has been approved. Then double-check when it’s due for payment. In 90% of the cases, a quick call to a company’s accounts department will give you all the answers about why your invoice has not been paid and when you can expect it. And don’t be embarrassed about doing this, because those people you speak to in the accounts department will spend most of the day doing the same calling their customers and chasing their own invoices!
If your customer is a smaller company that doesn’t have a separate accounts department, then don’t be afraid to ask directly for an update. Get into the habit of regularly reviewing who owes you money, which invoices are coming due and having a quick call (or email) around to get an update. Keeping on top of who owes you money is an important part of maintaining a healthy business and in fact, like most of the admin in your business, you can automate most of it. If you’re using a professional accounting package then usually it can automatically chase payments for you with reminder emails to your customers. Most people are never on top of their admin and all it takes to resolve the majority of overdue invoices are a few nudges.
Getting involved to resolve the issue
However, at some point you will likely find yourself in a situation where a customer has had all the reminders, you are sure they have your invoice and this isn’t a case that your invoice has been overlooked, they are simply choosing not to pay you. And this is where you need to get involved yourself, and the sooner the better. Don’t shy away from it because the longer you leave it, the harder it will be to get a resolution. First, you need to find out why the invoice isn’t being paid. Is it because they have an issue with what you’ve supplied them (in which case be on your guard because why didn’t they raise that before and give you a chance to rectify it?) or are they simply unable to pay it because they just don’t have the money?
In the first scenario, your terms and conditions should have already outlined your returns policy (if you allow returns) and state what window a customer has for making a return or reporting a fault. And there’s a very simple rule of thumb to follow: if someone has a problem with what you have delivered to them, then they can return that product to you in good order to get a refund or a replacement, or they can keep it and pay for it. They can’t do both. They cannot say the product wasn’t fit for purpose but keep it and use it anyway without paying for it. If it’s not fit for purpose, then they need to send it back to you or allow you the opportunity to correct it. And be aware, some people will use this as an excuse for trying not to pay, or at the very least to try and get a discount. So make sure your terms are very clear on your return and replacement policy and stand politely and firmly by them. Remember that if someone doesn’t pay for a product then you still own it – you can turn up at someone’s premises to get your product back if they haven’t paid for it!
But this isn’t just for physical products, it’s the same for services too. If you have a way to remove or withhold the services you have delivered then you should do if someone is refusing to pay up. As with a physical product, the copyright for what you produce isn’t transferred to a customer until it has been paid for and your terms should reinforce this. So don’t leave someone’s website online if the customer is flat refusing to pay you for building it. Use what leverage you have – if you’re due to deliver a training session to a company and they haven’t paid the overdue invoice for the last one, then let them know that they need to bring their account up to date before the programme can continue. Be fair, but be firm. Don’t be embarrassed because you are not the one at fault.
If a customer is being honest with you and explains they simply can’t pay, but believe they will be able to shortly, then you might want to consider offering a payment plan instead. Suggest they pay off 20% of the invoice every week until it’s clear instead of having to wait until they have the full amount before you see any money. Or ask if they can pay half now and half in a couple of months when they have been able to collect their own debts. But then closely monitor the payments to make sure they are keeping to the deal. Getting half of your invoice paid before a company eventually goes bust is better than trying to then fight all the other creditors after they go under!
Reducing your company's exposure to unpaid invoices
The better situation is to make sure that you avoid exposure to debt in the first place. Because we’re all so used to buying online we’re also used to paying in full when ordering too. If you bought print 20 years ago, you could get thousands of pounds worth of brochures delivered to you and the printers would then give you a month to pay for it. Now if you order print online, you will be expected to pay on a card at the same time you upload your artwork. There’s usually little benefit to giving credit to customers and it leaves you exposed to bad debt. Whereas asking for payment upfront makes you a much more cash-positive business and means you don’t spend all your time chasing invoices.
If you don’t think a customer will pay upfront in full for what you provide, then make sure that you take a deposit that will at least cover your costs. It should be an amount that means if someone doesn’t pay you at the end, then you might lose the profit from the deal but you won’t be out of pocket. That’s why it’s not unusual for service-based businesses to ask for 50% deposit upfront and it’s also really common to build-in staged payments within projects. For example, a 25% deposit on order and then another 25% at a certain project milestone, with the remaining due on completion. Don’t spring this onto your client after you begin, make sure it’s there at the proposal stage and that everyone is aware and expecting it. Also make sure that they understand that the project won’t continue until that mid-stage payment is received.
You can also look at something called invoice finance. This is where the customer still gets a period of credit but another company takes on the risk, so when you raise the invoice the finance company pays you the majority of that invoice upfront, and then they invoice the end customer and take responsibility for chasing that payment. This is most common in large capital purchases when people are buying high-ticket machinery or vehicles, but depending on what you sell it might be a solution for you too.
Make sure that you take a deposit that will at least cover your costs. It should be an amount that means if someone doesn't pay you at the end, then you might lose the profit from the deal but you won't be out of pocket.
Looking at what other options are open to you
Even after all this, it might be that you still just can’t get the customer to pay up and you have to start considering what other options are open to you. You can engage the services of a debt collection agency, although there’s only the chance of them getting a result if the customer has money to collect and if you have all your paperwork in order proving they agreed to your terms and that you delivered the end-product undisputed. Your local solicitor may offer a service to send a legal letter to a debtor on their headed-paper for a small fee, and again sometimes the possible threat of legal action is enough to get someone to either pay up or at least start talking to you.
It’s also worth remembering that you can start adding interest to overdue invoices. In the UK for example, you can add what is called ‘statutory interest’ after 30 days which is 8% plus whatever the Bank of England base rate is. You can even state a higher rate in your terms and conditions. Again, most companies don’t actually follow through with collecting the interest, but the threat of adding interest to an already overdue payment can be another useful tool.
Taking the legal route
And then finally, if you have exhausted all other opportunities you may wish to settle the matter legally. This should only ever be the final option once you have tried everything else because it will take a lot of your time, it will cost you money and it comes with no guarantees of success. Here in the UK we have the small claims system that was set up just for these kinds of disputes and most countries have similar systems in place. It can be for claims up to ten thousand pounds here in the UK, but you need to be sure of your case and you need to make sure you have a lot of confidence in your claim. The small claims route also has some other options before it goes to a judge, they can offer a mediation service that will avoid the case going for a hearing and instead work to help you resolve any disputes with a customer. You could also ‘win by default’. If you lodge a complaint against a company and the person or company doesn’t respond within 14 days, then the court may automatically rule in your favour. Winning is no guarantee that you will see any money though. The company may only be ordered to pay a percentage of what they owe, and if they don’t have any money at all then suing them will not change that fact! Different countries have different legal systems, but usually these kinds of small claims systems don’t need a lawyer, they are set up to be easy to understand and follow without needing legal representation.
Taking that legal route should only be an option you take if everything else has failed. Instead: make sure you are protected with good terms and conditions and that you are collecting the right information and evidence of your order; make sure that both you and your customer fully understand what is expected on both sides; make sure that you are collecting payment upfront or taking deposits; and finally, make sure you keep on top of your payment collection as a business. These are the things that will make getting paid so much easier and hopefully protect your relationship with your customer too.
A bullet point recap of what we’ve just covered in this article:
- Money is like electricity; if it runs out then everything shuts down. And if that happens then you cannot realise the dreams you have of making a difference with your business. Even if you are not in this for the money, you need to make sure that the money keeps flowing through your business and that means making sure you take debt collection and getting paid as seriously as you do the rest of your business.
- Usually you will get paid without a hitch, but there are plenty of people out there who know how to get around paying you if you don’t have the right documentation in place to make an order legally binding. If you don’t have the right contract in place and someone simply decides not to pay you, there’s not a lot you can do about it!
- At the centre of your contract with a customer is your terms and conditions or your ‘terms of trade’. This is a document that outlines how you are going to do business, and when you take an order from a customer you need to make sure you gather evidence that they have read and agree to these terms. Get advice, pay for some to be drawn up, or go find examples online to study.
- Make sure your customer knows when they are expected to pay and follow-up a week after submitting your invoice to make sure it’s on the company’s system and to find out when it’s scheduled to be paid. Some companies have very set procedures for submitting invoices and registering as a supplier, so make sure there have been no issues with your invoice and it’s not sat in limbo.
- Get into the habit of regularly reviewing who owes you money and make use of your accountancy software’s automatic reminders to automate a lot of the follow-up. Usually all someone needs is a nudge to pay an overdue invoice, and keeping on top of who owes you money is an important part of maintaining a healthy business.
- Make sure your terms clearly outline your returns policy and stand by it. Remember that a customer can keep the product and pay for it, or they can return it. They can’t do both – they can’t say something is not fit for purpose but keep it without paying, your product remains your property until it is paid for.
- Use whatever leverage you have to get an invoice paid. For example, the copyright for something you have created doesn’t transfer to a customer until they have paid for it. So don’t leave the website online that someone is refusing to pay for and don’t keep delivering a service if you have previous months’ bills unpaid. If they have stopped paying you, then they have broken off that customer relationship, not you.
- If someone is struggling to pay then find out what they can afford. You might want to suggest a payment plan, for example, they pay 20% a week until the invoice is cleared. Or ask if they can pay 50% of the invoice now and 50% next month. Getting half of your invoice paid before a company goes bust is better than fighting all the other creditors after they go under!
- The better option is not to leave yourself exposed in the first place. People are more used to paying upfront for products and services now, especially if they are placing the order online. Or ask for a deposit and set payment milestones to make sure you’re not out of pocket if there’s a problem getting paid after you have delivered.
- There are legal avenues you can take but you should only consider them once you have exhausted all other options. Legal mediation, pursuing a claim through the small claims system, and even using debt-collection agencies. But remember, if the customer simply has no money to pay you, then winning a court case against them won’t change that!
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