Dealing with a client that’s going through financial problems requires that you be proactive. If an invoice is already significantly past due by the time you realize a client is having trouble paying, your chances of getting paid are greatly diminished. So let’s talk about a few steps you can take to make sure that your client’s financial difficulties don’t become your financial difficulties.
Step one: Early Detection
The sooner you know there’s a problem, the better. Watch for red flags—signs that your customer might not be as financially secure as you’d like them to be. What kind of red flags?
It might be a red flag if your client is unusually temperamental about the budget. Or, maybe you’ve noticed their payment behavior is steadily worsening. If your client is a public company and they’ve submitted a form 8-K to the SEC (which is a requirement for public companies when they hit a bump in the road), that is a red flag. Maybe you’ve lost touch with the client—that, too, may be a red flag.
The most obvious red flag is a bankruptcy filing. Bankruptcy opens up a whole new can of worms best addressed by an attorney, but in a nutshell, if your client owes you money and they’ve filed for bankruptcy, you have a set of steps you have to follow that are dictated by the court. In the meantime, you can no longer attempt to collect the debt. Be prepared for the worst. While it’s possible you will get some sort of payout, you will likely only get paid cents on the dollar, if at all.
Okay, so, you’ve spotted a red flag—what do you do now?
Step Two: Communicate
Just because your client is going through a difficult time doesn’t mean that they’re a customer you should avoid working with. The best way to find out what’s going on is to talk to them. Meet with them in person if at all possible. This can be a really sensitive issue, and sensitive issues should be dealt with face-to-face. If you can’t meet face-to-face, set up a time to talk on the phone. Use email only as a last resort.
While you’re speaking with your client, be sure to listen really well. Get facts. Ask a lot of questions. Find out exactly what the problem is, and don’t be afraid to get specific. If you’ve extended credit to them, you’re in a sense their banker. Would their banker ask them hard questions if they were missing loan payments? You bet.
Not all money problems are created equal, though. Find out if they’re dealing with some sort of short-term issue (is this just a 30-day thing?). Or is this something that’s threatening the existence of their entire company? Maybe they’re just waiting on a payment from a client, and when that payment is received, they’ll pay all of their vendors. In that case, it's important to ask how are they deciding which vendors are getting paid in what order. If somebody is getting paid, you want to make sure that somebody includes you.
While you talk with them, take notes. Then, later, send those notes in an email to your client to make sure that you’ve understood everything correctly. Doing this not only makes sure everyone is on the same page, it also makes sure that the issue has been documented and time-stamped.
Step 3: Tell Them This Is Important to You
As you're talking to your customer, be sure to let them know how important this invoice is to you and to your business. Let them know that this is money you’re counting on. Be more than a faceless invoice. Let them know that there are real people and a real business counting on their payments.
Step 4: Take Action
First, if you have not already done so, consider carefully whether you should continue to extend credit to this customer for new business. Move to a pay-in-advance policy if it is warranted, or ask them to delay new orders until their account is current.
Second, having talked with the client and gathered all the facts, don't be afraid to ask for a payment. Start by asking for a commitment to pay the entire balance by a certain date. If that's simply not possible, you may want to work on either a discount strategy in exchange for an immediate payment or some sort of payment plan. Whatever you agree on, be clear and specific about what is expected and when it’s expected, then get it in writing.
Working with customers who have financial difficulties is a delicate balance: Flexible, but firm. Friendly, but persistent. It’s not easy, but it will likely be the difference between getting nothing and getting paid.
Now, go get your money.