Getting paid by your customers

Make sure you know what you can and cannot do when a customer doesn’t pay.

Myth #1: A business contract needs to be written by a lawyer. The legal profession would like you to believe that this one is always true. Sure, it's occasionally true in complex contractual situations—then the attorneys step in. But for many small businesses, most contracts won't require a lot of legalese. Plain English will work best for these documents.

Myth #2: If you ask someone outside the accounting department about where your payment is, it will just slow down the payment process

This is very rarely the case, particularly if you're dealing with a large company taking its sweet time to pay up. Many accounts payable departments are designed to pay small company vendors slowly for a number of internal accounting reasons—but will move quickly if someone higher up asks them to.

Besides, most accounts payable people know they will eventually have to pay you, even if they sound annoyed to hear from you. Talk to whomever you think will speed up the process of getting paid—even the company president or another corporate officer if it makes sense. But don't pay attention to anyone in accounting who claims going outside their department will slow things down. And regardless of how annoying their responses sound to you, remain polite.

Myth #3: Late-paying customers are all scam artists

It can seem this way, that's for sure. However, your client may have real financial problems that delay your payments. It's unfortunate—but you still need to get paid. Take a cue from collection agencies who say that the most persistent creditors usually get paid first.

You can also consider other payment options if the customers' finances seem to be in extremely bad shape. If this is the case, ask how much the customer can realistically pay, or if a payment schedule or onetime discount will take care of part of your bill. You might not end up with all the money you originally anticipated, but sometimes it's better to get something instead of nothing.

Myth #4: Sometimes you just have to bully a customer into paying

Yes, it can be tempting to make threats, but don't harass people who owe you money. Instead, remain calm, and let them know you watch these matters closely. Why? Well, threats can turn into legal action against you, even if you're correct that the customer owes you money. And if you remain professional (but persistent), you're more likely to get paid.

Myth #5: A collection agency always takes half of whatever it collects

If you turn a debt over to a collection agency, that service will usually keep 50 percent of what it recovers—but collection agencies provide other services for flat fees. One of the best ways to initially use a collection agency is to have it send out a series of letters on your behalf. For example, Dun & Bradstreet Small Business Solutions will write a series of three letters for $40. They will also make telephone collection calls on your behalf. Other companies, such as Transworld Systems and I.C. System, offer similar services.

Myth #6: There are governmental agencies that can help you collect business debts

Not true, except when a debtor doesn't pay attention to a court judgment—then you can ask the county sheriff to step in. But otherwise, you're on your own, which is part of the responsibility of being self-employed. Of course, when you collect, you'll be enjoying one of the privileges of self-employment.

Myth #7: You can only sue for amounts under $1,000 in small claims court

Actually, the amount you can sue for depends on the state. The limit is normally between $2,500 and $10,000, depending on where you do business. And even if you're owed more than your state's limit, you can still sue in small claims court if you agree to only sue for the maximum amount.

Myth #8: You can write off bad debts on your taxes

Sometimes, but if your business only provides services, you can't write off bad debts. The rationale behind this rule is that it would be too easy to inflate bills and then claim large deductions for bad debts that never really happened. But if any part of the bad debt is for goods, it's a different story. Then you can deduct the cost of goods that the client received but never paid for.

Myth #9: You can start assessing late fees as soon as a customer is late with payments

This myth is partially true. If late fees are part of the original contract terms, then yes, you can assess late fees. Keep in mind that a late fee is normally assessed as a monthly finance charge, which can be figured out by:

Dividing the annual interest rate you think is fair (and in most places, you can't charge more than 10 percent per year in late fees) by 12, which determines the monthly interest rate you'll charge.

Multiplying this monthly rate by the amount the customer owes you, which gives you the actual monthly late fee

Seem confusing? Try this example: If the annual interest rate is 12 percent, the monthly interest rate is 1 percent. So if a client owed you $10,000 on the original bill, you would multiply this amount by 1 percent to figure out the late charge. And since 1 percent of $10,000 is $100, the client would owe you an extra $100 for every month the payment is late. But remember that if this isn't part of your original agreement with the customer, you won't be able to tack on late fees.

Myth #10: It's important to make sure every client pays up

True 99 percent of the time. But then there's that 1 percent of the time when pursuing a bad debt just isn't worth it. Sometimes there really is no way to collect from some people, and after a while, you may decide it's best to write off the debt—and concentrate on helping your paying customers.