How To Collect Money From Clients Who Won’t Pay

Tips & Tricks

Blog _Collect Money from Clients Who Wont Pay_CoverMost of the time tradespeople deal with straight-up clients who pay on time and with a smile. But at some point, you may have to face the awkward experience of dealing with a client who won't cough up the cash. Whether they continually pay their invoices late (stuffing up your cash flow as a result) or blatantly refuse to pay, there are options available to handle even the stickiest situations.

Common disputes between tradespeople and clients

Most disputes between tradies and clients occur because:

  • There are delays in material delivery to the job.
  • The client makes changes but doesn’t want to pay for them.
  • Design flaws cause issues on-site and require time and money to put right.
  • Other subcontractors working on top of you disturb the integrity of your work.
  • Clients don’t pay their invoices on time, or at all.
  • Personality clashes lead to tension.
  • The client has unrealistic expectations about the job.

When you can see a situation escalating toward a full-on dispute, what should you do? Let's look at how to minimise problems in the first place, how to keep your cool when dealing with unpleasant situations, and what to do when non-payers pop up.

Jump ahead:

1. Set your payment terms

First, it’s important to make sure you’ve got a process in place and expectations are clear from the outset. While it might seem like extra admin (when you’d rather be getting on with the job), encouraging easy and timely payment will save you time and stress in the long run. It also helps to be transparent with clients about your processes from the outset.

The standard 30-day payment period is a thing of the past, with shorter payment terms now the norm. According to Xero, close to 75% of invoices now ask for payment within two weeks. If your terms are clear from the start, customers shouldn’t have an issue.

Get a downpayment

Asking for a down payment on a job is perfectly acceptable. Not only are down payments becoming the norm but they also help put your customers at ease, as they feel it means their tradesperson is now more likely to show up.

You can ask for a 25-50% down payment on work less than $10,000 in value and between 5%-10% on larger jobs.

Getting a down payment will make a significant difference to your cash flow. It also allows you to set some benchmarks around payment terms. For example, a down payment must be made electronically, in advance, 7 days from quote acceptance.

Consider getting a credit report

One really easy way to reduce the chance of bad debts or late payments is to get a credit report done on any new SME customer you take on board. A credit report is a very cheap, quick and easy way to get some insight into who you’re dealing with and whether or not they can be trusted to pay on time.

2. Charge interest on invoices or incentivise prompt payment

It’s perfectly legal to charge interest on an overdue invoice that accumulates daily after the due date. Alternatively, you could try incentivising early payment by giving a small 'prompt payment' discount.

Many people prefer to pay by credit card these days, because it enables them to collect rewards. This is great, as it means you can literally get cash in the bank on the same day you finish a job. This may sound like a huge headache, but it's easy with Stripe.

Stripe provides a small dongle that attaches to a smartphone. The dongle reads a credit card chip and the simple app allows you to take payments just using your phone. Many banks operate a similar product connected to their business packages. Speak with your bank manager about options in your country.

Better invoicing is done faster, online and with the help of invoicing software.

Our customers notice the impact of better invoicing already. Jonathan Clark from Watts Up Electrical noticed that taking operations online made life much easier and saved him invaluable amounts of time.

“Doing things manually is so time-consuming and draining, that sometimes you just say, ‘screw it’, invoice blind and hope that you’ve allowed for everything."

With Tradify’s mobile app, you can track your time and allocate costs to a job as you go. If you spot an error, you can quickly make adjustments, giving you confidence that you’ve included all of your time and materials. You can also pre-load (and update) supplier price lists, pricing levels for different customers, and your hourly billing rate, and add these to your invoice using dropdown menus – no more do-overs or double-checking.

Not sure what your charge-out rate should be? Check out our charge-out rate calculator for trade businesses.

3. Decide whether partial payments work for you

Depending on your trade or the job at hand, you might consider partial (or staggered) payments. This is particularly useful if you’re having to fork out large amounts of cash for materials at the start of a job.

You can generate a billing run in Tradify to create a bulk lot of invoices – we’re talking 20 invoices in a minute! You can either create one invoice with multiple jobs for a single customer or a bulk invoice for multiple jobs across lots of different customers.

4. Send reminders

Set up automated reminders to send the day before invoices are due. Use automated reminders alongside our X-Ray vision feature so you can see when your customers receive, view and take action on your quotes and invoices.

body image_pipefix plumbing sitting at his van on an ipad

When you’re sending out lots of invoices every week, it’s easy to forget which ones have been paid and which haven’t. Chasing up unpaid invoices often falls to the bottom of the pile when you’re struggling through hours of paperwork each night.

Luckily, if you use accounting software like Xero, Quickbooks, or MYOB, you can pull out and notify late-payers with the touch of a button.

For example, in Xero, you can automatically see your debtors on a projected graph right on your dashboard. This means you can see in advance when lots of payments are supposed to be coming in, and also who you should be chasing up.

5. Follow up with a phone call

Email or SMS reminders are easy to ignore and can sometimes be innocently missed. While picking up the phone might feel awkward at first, pitch it as a follow-up on the work you’ve done – and a friendly reminder that payment is overdue. Try getting clients to pay by credit card or internet banking while you’re on the phone, and follow up your conversation with an email confirming what you’ve discussed. That way you’ve got it in writing should you need it.

6. Handle disputes professionally

You want the best possible outcome for your trade business and keep your clients happy at the same time. Whether that means simply getting paid what you’re owed or solving sticky situations like unrealistic expectations or unexpected delays, here’s some solid advice on approaching disputes like a pro.

Calm down

In an ideal world, all disputes would be dealt with in a businesslike way. However, it can be really difficult when clients, suppliers, or contractors are taking money out of your pocket, especially if the source of the dispute isn’t your fault. It’s human nature to get defensive.

That's why it’s a great idea to let off any steam before dealing with the client. Talk it through with a buddy or partner so you avoid confronting the client or subcontractor with all guns blazing.

If you’re struggling to keep your cool around a client, then walk away and calm down. Tell them you’ll contact them later with a potential solution. Once you’re away from them, then you can vent.

Get your facts straight

Get to the bottom of the issue. Dealing with any dispute means wrapping your head around the problem and checking all your records for the job. You need to see what’s gone wrong, and how. Talk to the team members who dealt with the job and make sure you get as full a picture as possible.

If you’re lucky, a simple fix will present itself. However, you’ll usually find that small mistakes and issues all compound together to produce a thorny problem.

If you’re using Tradify to manage your jobs, it’s as easy as finding the job on the app. You’ll have all the job data stored there. If you’re using the photos function, your team should have stored images of their completed work against the job – useful if the finish of the work is in dispute.body image_pipefix plumbing and customer viewing information on an ipad

Get professional advice or mediation

If you’re part of a trade association, you can access advice on what process to follow. Some trade associations also provide mediators to work with you and the client to agree on the way forward. If yours doesn’t provide a mediator, you can engage one independently. The mediator will listen to both sides of the story, define the crux of the dispute, and then present settlement options.

Neither party is legally obligated to accept the mediator’s ruling or settlement terms, but at this point, your only other option may be court, and that can be expensive and disruptive to your business.

Find a mediator in your area:

Sometimes, the best solution for a dispute is not about proving you’re right, but about giving your client a solution that satisfies them, without disrupting your business or ruining your good name.

If at all possible, try to work things out with the client. Offer a compromise – most of the time, people are perfectly reasonable. Once they’ve had time to cool down, they’re happy to accept a compromise instead of escalating the issue.

Calmly and rationally explain your side of the story, and try to understand their side, and what they want the outcome to be. See if you can meet somewhere in the middle.

7. Last resorts to get what you're owed

If you're still struggling to receive your money after it's due, then you’ve got the right to act. Here’s where to start:

Offer payment by instalments

If you’re feeling big-hearted and your cash flow can take it, you could offer payment by instalments. Something like 50% now and 50% the next month could work. Be warned — this can create extra admin and extend the non-payment pain.

Fire a warning shot

Assuming the client will no longer be a customer of yours (as this is a relationship-killer), a formal letter issuing a seven-day payment request before taking further action might just nudge things along. This is also called a letter before action (LBA) and is legally required before passing the debt collection on to a third party.

Engage a debt collection agency

Debt collectors typically work in two ways – either by assuming your debt (buying it off you) or working on your behalf for a fee. Depending on local laws, the agency’s fee may even be partly or completely paid for by the customer. While debt collectors have to abide by legal guidelines, their success rates vary – so it’s worth shopping around to find one that is the right fit for your business.

Go legal

Depending on the amount of money you’re chasing, speaking to your lawyer or the small claims court are the last remaining options.

UK – Make a court claim
AU – Small claims tribunal
NZ – Disputes tribunal

Before you can commence any legal activity, you need to show you’ve done everything you can to collect the debt. This includes using a debt collector, so it’s important to try that first.

body image_danjac electrical on phone next to white van with milwaukee storage binsProtect yourself first, then call for back-up

Disputes and non-payment are typically the worst part of running your own trade business, and you’ll probably have to deal with them at some point. It’s important to have robust processes in place upfront to keep these to a minimum.

Tradify has the tools to make this easy – including invoicing on time, automating follow-ups and keeping job info on hand for when you need to check old records. However, if situations get worse, know that you’ll always be able to get legal backup if you need it.

Start your 14-day free trial, or jump on one of our weekly live walkthroughs to see Tradify in action. It's a great way to see if Tradify is the right tool for your trade business.