Getting what's owed

Features - Finances

Don’t let customers’ failure to pay put your company out of business.

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August 10, 2012
Jeff Fenner

Nothing aggravates a snow management professional more than a customer’s failure to pay their bill on time. But theirs is a shared pain with other small business owners across the country.

According to research from PaySimple, a cloud-based automated receivables technology service for small businesses, 49 percent of small businesses experience late payments from customers on a monthly basis. The survey also revealed 41 percent of small business owners say late payments were their biggest pain point.

Those statistics are not far off from what snow contractors experience when collecting payment for snow and ice management services, according to Snow Magazine research. On average, more than 65 percent of snow contractor report having issues with late payments. However, only around 20 percent resort to sending delinquent clients to collections.

Consistent cash flow is critical to small business owners and allows them to invest in new equipment and technology, create new jobs, and engage in new business opportunities. Without consistent cash flow, these initiatives can be put on the back burner or worse yet never get off the ground.

How do you avoid having your operation be put at risk of non-payment by customers? According to Michelle Dunn, an expert on credit and debt collection, and author of numerous books on the subject, the most effective way a small business owner can avoid delinquent accounts is to screen customers before starting service.

“Having the customer fill out and sign a credit application is easy and painless,” says Dunn. “The biggest mistake business owners make when having customers fill out credit applications is not following up on it. Once you have a credit application – the ball is in your hands to check the credit of that customer to make sure you are limiting your risk.”

Dunn says establishing effective and clear payment terms are very important. Your terms should be clearly printed on everything that goes out of your office – the credit application, invoices, estimates, service reports and statements.

“Set your terms based on how you want to be paid, and when your business bills are due,” says Dunn. “That way when it is time for you to pay your bills, you will have your customer payments in the bank and might be able to take advantage of some early payment discounts.”

Bruce Waterhouse, an attorney with Nicola, Gudbranson & Cooper LLC in Cleveland, Ohio, and an expert in advising small business on collections, says setting up a clearly defined internal system for collecting customer payments early on is important for success going forward.

“Have a system in place from the start and take the time to make sure your contracts and agreements are in order,” says Waterhouse. “Work with a lawyer to create documents that clearly explain payments terms, penalties for late or non-payment and list any special risks associated with servicing the account.”
 


Keeping accurate, complete records will help small business owners keep delinquent accounts in check and assist in the collection process if it reaches that point, Waterhouse says.

“Organization and attention to detail pays off for small business owners when it comes to collecting on accounts,” he says. “Be able to show history and specific details for the account.”

Another tactic many snow management professionals use, especially with residential accounts, is requiring advance payment before the service starts. Sometimes combined with a discount offer for paying in full, this method guarantees you won’t have to chase down customers for payment once the snow starts falling.

But what if you find your company stuck with delinquent accounts? The first step is to start the collections process early and be proactive. Dunn recommends making a customer service call at 25 days (for example, if you are on a 30-day cycle) to make sure they received the invoice, check if there were any issues with the invoice (incorrect price, etc.) and verify the payment terms.

Also don’t be lulled into complacency with repeat customers; everyone’s credit can change and Dunn suggests it is smart to review this on an annual basis.
 

Selecting a collection agency

If faced with hiring a professional collection agency to clean up delinquent accounts, how do you go about selecting one? Credit and debt collection expert Michelle Dunn offers questions small business owners should ask when researching a collection agency.

  • Have they collected your type of debt before? A specialized agency may be your best option. If there isn’t one for your industry, select an agency that has experience in collecting on your type of debt.
  • Talk to their customers and read testimonials on their website. How long have they been using the agency? How do they like the service? Is there anything they don’t like about them? Ask online discussion groups if they have any experience with them.
  • Check the agency out with the local Better Business Bureau. Do they belong to any trade associations, or a local chamber? Have they had any complaints against them for law violations? How often, when was the last one, and was it resolved?
  • What do they charge? What’s included in that fee, how will they get paid and how will they pay you? Make sure they are willing to put it in writing.
  • Do they list all their contact information and pricing on their website? Do they have a physical address? Does a live person answer the phone?
  • Are they licensed and bonded? Do they have errors and omissions insurance?

 

If the proactive approach does not yield results, Dunn recommends small business owners do the following:

  • Call them again. Ask what you can do to help them pay the bill on time and get a payment promise.
  • Send a letter following up on your call – mail it immediately. It can be short and sweet but must be very specific. Make sure to mention how much will be paid and by what date.
  • Follow up! If you get voice mail, call again the next day.


If customers are still not providing payment, small business owners may have to bring in reinforcements and turn to a professional collection agency (See “Selecting a collection agency,” 69) or the legal system for relief. But how do you know when to make that call?

Small business owners need to establish a threshold amount that will trigger bringing in a professional agency or legal counsel. “I’ve seen small businesses be successful with collections by being diligent and following the plan,” says Waterhouse. “But at times it pays have a professional on your side that knows the laws and can advise you on the next steps.”
 


Small claims court is one option snow management professionals may consider for collecting payment from delinquent accounts. Consulting with an attorney on the limits you can sue for in small claims court and the costs involved with filing suit for larger amounts is recommended.

Waterhouse says an attorney will also be able to advise you on the laws in your state that may help you collect on delinquent accounts. “Know when enough money is at stake to pursue legal action and when another method might work better,”he says.
 



Quick Tip

When dealing with clients behind on their bills, Corona, Calif.-based business consultant Barry Maher, says it’s important to continue to treat them as valued customers.

“To avoid embarrassing them, start out by ‘just touching base’ to see if the payment fell between the cracks or there was some oversight.” Maher says.

“Then show understanding, allowing them to save as much face as possible,” Maher adds. “At all costs, avoid getting their backup so they become defensive and look for reasons why they shouldn’t have had to pay in the first place. Only once it’s clear that your efforts aren’t going to produce results would I turn the debt over to the agency.”


 

Jeff Fenner is a Cleveland-based freelance writer and frequent Snow Magazine contributor.