Invoicing as a contractor, specifically handling late payments, is never easy; finding the right balance between being firm enough to protect your business interests and accommodating enough to earn a strong reputation among your customers is an art. It’s a mixture of soft skills, hard policy, and rigorous account tracking, but when you have the right system in place collecting payments can be close to painless.
If you aren’t using an invoicing software for contractors and other service businesses, that’s a great first step. Keeping clear records and tracking when and how customers make payments is important, especially if you end up in small claims court.
The Process for Late Payments
If you don’t have a late payment system in place and want to move beyond general advice, here’s a standard model that you can build on to develop a late-payment system. It isn’t perfect for every situation, but it’s a great starting point. As always, your starting point should be a clearly documented work process and a work contract that’s been verified by a lawyer.
In your contract’s payment section, you should explicitly define the accepted payment methods, to whom/where the payments are made, and for how long after the invoice date payments are accepted before fees kick in.
For the section describing the late-payment fees, use a simple plain-language structure; typically an additional percentage of the outstanding principal added-on each month. If you have any differences between your payment collection systems (normal vs. late payments) make sure it’s explicitly defined. When it doubt, simple systems are the best.
The Contact Cycle
When a client’s account turns delinquent, it’s important to avoid being too prompt when starting the contact/collection cycle. Contacting them the week they go delinquent gives the appearance of a grace period; contacting them the hour they go delinquent gives the appearance of desperation and needlessly aggressive policies.
Email is a safe choice for your initial contact with delinquent clients, however, you should be prepared to escalate through multiple contact methods should they fail to respond. Phone calls are by far the most personal contact method, however, they’re also the hardest to verify should the conflict come to a legal head. Certified mail is the most traditional and most traceable way to issue delinquent payment notices. Showing up in-person is almost always a bad idea.
Handling Payment Negotiation Attempts
Oftentimes, delinquent clients will attempt to avoid payment by claiming insolvency or challenging the invoice structure. In some situations, the most viable way to assure payment is to transition their standing invoice into a payment plan that with additional contractual support that will ensure that the client will supply at least partial payment.
Whether or not you offer a payment plan depends on the situation, however having a defined contractual system for that payment plan is important. By formalizing the process you’ll maintain professionalism and prevent your clients from abusing your good will. Above all, get it in writing.
Make Payment System Explicit
Beyond the specifics of your system, you need to make sure your customers can see it and understand your payment system and invoice. Making sure your customers understand your policies before they sign the contract is a key part of contract compliance, independent of the terms themselves.
On the flip side, starting your quote/inspection process with an extended lecture about payment policies and late fees is an easy way to turn away potential customers. No one wants to feel like they’re being judged, especially when that judgment is rendered by default. If you make your potential customers feel like they’re delinquent before the job has even started, you’ll be starting off on the wrong foot.
Your best choice is to build your explicit payment-process conversation around the positive things you offer – remote payment processing, online payment methods, etc – and include the punitive elements in the positive pitch. Use non-accusative language and emphasize that the late payment system is automatic, focusing more on the positive side of the payment window and payment options instead of how much the late payment fees will cost them.
Get It In Writing (Again)
You can’t hold your clients to a payment system they didn’t agree to. If you’re changing (or instituting) a formal late-payment process, make sure it’s reflected in the service contract your customers sign.
Keeping track of your paperwork can be hard when you’re running a small business, so it’s a good idea to use a digital contract management system. When you do encounter a customer who tries to fight an invoice or issue a chargeback, a bulletproof contract system is your best defense. Don’t bury your payment terms in an obscure part of the contract; make them clear, explicit, and easily interpreted.
It’s also important to ensure that the terms of your contract (and thus your late-payment process) are legally binding. Take the time to talk to a lawyer, and make sure your contracts comply with state and federal law. The up-front cost is well worth the longstanding protection, and it can save you a nasty court conflict if a client refuses to pay.
Keep Your Cool With Customers
The most important part of dealing with your customers is staying professional. Even when you have the right contracts and the right pitch, losing your cool can jeopardize the payment collection process. Making your clients feel threatened or escalating the emotional conflict to the next level is an easy way to push a payment permanently beyond your reach.
Getting into an emotional conflict with a bad customer can earn you bad reviews and a worse reputation, as it goes directly against any professional image you may have. Any kind of personal insult or attack issued by a business reputation will quickly be amplified across social media.
When in doubt, fall back on your payment collection process. Have email or letter templates prepared in advance, and take time to cool off before making phonecalls. Fall back on procedure instead of anger when customers are reluctant to budge.
The Bottom Line for Invoicing for Contractors and Late Payments
At the end of the day, having an explicit late payment system will help you stay on top of your contractor invoices. Relying on memory and off-the-cuff decision making when dealing with delinquent clients is an easy way to find yourself in the red. You won’t be able to recover every invoice, and taking someone to small claims court can be a fruitless process, but having a system to fall back on when dealing with frustrating customers is invaluable when you’re juggling the work that comes with running a business.
Ready to step up your invoice game? Check out our blog: How to Create a Contractor Invoice.