Tuesday, April 13, 2010

Getting Customers To Pay Consistently And On Time

Q: We have a clean, professional small shop. The problems we are encountering is getting our customers to pay on time when their repairs are done. Any suggestions would be appreciated. Thanks. — Phil

A:  Let me begin with a sad story. Back in the day when I was a young lawyer trying to launch my law practice, I had a potential client come in the door. He needed to file bankruptcy and asked me whether I would agree to accept half of my fee up front and half in 30 days. Since, as I said, I was new to business and had a family to feed, I agreed to his proposition. New clients were good.
I dutifully filed his paperwork and began his bankruptcy proceedings. Then, about a week later, I received notice that he was dismissing me as his lawyer. I didn't get it. Then, about a week after that, I received a notice in the mail that I was being named as a creditor in his bankruptcy. Then I got it. He essentially used me to get a BK filed for half price, the other half being written off in his case.
Hoisted by my own petard!

But it was a valuable lesson: If clients cannot afford to pay you when the really need you, that is, when they hire you, they can't afford you at all. Now, of course, there are many times when it behooves the small business to be flexible and work with customers regarding payment, especially in an economy like this one. But being flexible and being a softie are not the same thing.
Flexible good; softie, bad.

So how do you get paid consistently, and on time? Here are some tried and true methods:

The carrot:  We all have seen it: An offer of a discount if we pay our bills early. It is a good strategy. By offering 10% off for early payment, the business gets needed revenue in the door, the customer gets a welcome discount, and the relationship is strengthened.

The stick:  Another option is to have a clear policy stating that late payments will incur a penalty. No, you don't like doing this, but yes, it does work. The key is two-fold:

1. As indicated, be clear and up front about the policy. Make sure that clients and customers know that late payments are frowned upon and that as a result you have no choice but to tack-on a late fee for late payments.

2. Enforce the policy consistently. Letting people slide, or worse, not enforcing it at all, makes you a paper tiger. You don't have to be a jerk about it (although sometimes you do, see below) but enforcing your late-fee policy consistently will result in fewer late fees and more on-time payments.

Follow-up:  Assign an employee the task of following up with the late-paying customer. Be sure your staff member relays the gravity of the situation and explains that paying late, while sometimes understandable, makes running your business difficult. An email or letter can work, but a phone call may work better.

Be flexible:  Try expanding your forms of payment. For instance, getting a merchant account and beginning to accept credit cards can make things much easier on clients. Or what about PayPal? In extreme cases, consider the barter option.

Get paid up front:  Why do car dealers ask for a substantial down payment when selling a car? Because the lender knows that you have a far less likelihood of defaulting on the payment when you have some money already sunk into the deal. The same can be true for you – getting an up-front deposit, down payment, retainer, etc. works well.

Stopping work: Your choices get tougher the further down this list you go. It is of course always an option to explain that works stops until bills are paid. That gets people's attention.

The jerk:  You need to be very careful with this one, but there are times when clients take too much advantage, and when that happens being more forceful than not can help. I have written before about the power of what I call "the calculated blow-up." No one likes dealing with people who are upset, so getting upset (on purpose and within reason) can work. The caveat is that you don't want to blow-up the relationship (unless you do).

Of course you don't want to lose customers over a payment issue, but then again, some of those customers tend to be more effort than they are worth.

Today's tip:  The final choices are either to hire a lawyer to threaten or actually sue, or hire a collection agency. Typically, collection agencies recover about 25% of the amount owed and a payment-in-full occurs only 11% of the time.

Ask an Expert appears Mondays. You can e-mail Steve Strauss at: sstrauss@mrallbiz.com.And you can click here to see previous columns. Steven D. Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. His latest book is The Small Business Bible. You can sign up for his free newsletter, "Small Business Success Secrets!" at his website —www.mrallbiz.com.

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