Working independently to earn a living sometimes leads to financial trouble when contracted companies or individuals stop answering their phones and don’t pay up. The National Federation of Independent Business (NFIB) reports that nearly one in four small businesses claim their average invoiced payment extends 30 days past due.
These unpaid accounts can directly affect the bottom line. Time and again, contractors must change their jackets and become their own debt collectors. Unlike payroll at a company where employees can complain to state labor departments if they do not receive their checks, with independent contracting, it is your own responsibility to obtain the money owed to you.
Emil Hartleb, executive director of the Commercial Collection Agency Association, which represents prominent national commercial collection agencies, offers ideas on how to ensure that awareness of unpaid accounts is clear. “[Contractors] certainly should have a program for addressing collection of slow-paying accounts,” he said. “That program should address when they will start collection follow-ups, who will be doing them and what the next steps in the collection process should be if the customers do not pay. With a plan or a program like this, they have a handle on their past dues.”
To cut down on the number of open accounts, some contractors create contractual agreements that explain the specifics. Brad Causey, owner of a consulting business that hires contractors for labor, provides his customers with list of terms and conditions, which explains payment guidelines when hiring his company by making payment dates and timeframes of pursuing legal action more clear. “I usually require a certain percentage of the total estimated job cost to be paid upfront to cover labor and parts costs,” he said. “Most importantly, try to do business with reputable organizations. Never rely on the cost of the project to pay for the expenses entailed.”
If you send invoices out in a timely, professional manner, overdue customers are more likely to your ability to make them pay seriously. Chris Lehr knows firsthand how to deal with these unpaid clients. Lehr runs his own technical consulting business and has had payment problems with clients who have let their bills go three to four months late.
He suggests that e-mails be sent out to clients once their accounts are 15 days past due. A follow-up phone call should be made after the bill is 30 days late. “I haven’t had to go [to a] collection agency yet, but probably won’t unless it’s a sizable amount of money,” Lehr said. “Usually the deadbeats are only into me for under $500. Most of my clients pay pretty quick and have the money.”
Lehr also suggests holding these clients’ noses to the grindstone. For example if they call with an issue, ask for a check. “At that point if there is no check, I walk,” Lehr said. He believes that after 30 days and a follow-up phone call have not been successful, a certified letter that demands payment with a copy of the originally should be sent. And if within 15 days there is no resolve, I would then consider small claims court of collections.
Consistency is key with Causey as well. He believes it will often void the issue of legal action. The cost of legal assistance can often exceed the amount of money owed,” he explained. “Sometimes just threatening legal pursuit can persuade final resolution. You can usually be consistent with your requests and eventually get payment.”
Causey suggests creating a standard that highlights payment deadlines before seeking further help. “For example, your company could have a policy that takes legal action after six weeks of completion for any project or contract,” he said. “Alternatively, you could have a different dates for each project, being lenient with established customers and [stricter] with new [ones].”
Ultimately, if and when contractors arrive at the situation where they have expended their means of collecting their money and need to take further action, they can contact the CCAA. Hartleb believes there are three simple steps that independent contractors can follow that could significantly lower their changes of an excessive amount of unpaid accounts:
Effective credit review to be sure the customer is credit-worthy: “Making a credit decision is an important part of managing an accounts-receivable portfolio. A credit decision should be made based upon the customer’s payment record and its financial strength,” Hartleb said.
Implementation of an accounts-receivable management plan: Hartleb also suggested creating a plan of action. “A plan that specifies what steps the company will take when an account becomes past due [should be implemented]. For example, at 31 to 35 days past invoice date, the customer should be contacted by telephone.
Placement with a third party when the debtor has:
$ indicated that they will not pay.
$ indicated that they cannot pay.
$ issued a NSF check and not made it immediately good.
$ defaulted on two promises to pay.
$ Ignored all collection follow-ups, i.e., no response.
While obtaining the money owed to you should be a top-priority task, Lehr believes that sometimes the efforts aren’t valuable. “Sometimes it’s better to consider the money and, better yet the client, to be lost,” he said. “Because when they know they owe you, they don’t call you much. I consider one of my clients – currently owing me $300 or so – to be a pretty cheap fee to never have to call him again.”
