They said they were behind in their bills. Or maybe they weren’t entirely satisfied with something you did on the job. However it happened, they owe (take your pick) 10 percent, 30 percent, maybe more. In effect, these homeowners have decided to award themselves a big fat discount. The job’s long done, the supply house and subcontractor were paid months ago. And every time you glance at that number in the receivables column, you get a little more steamed. Your mailed invoices are ignored, your phone calls and emails requesting payment not returned.
A few preliminaries. Do you have what Imke Ratschko, Attorneys At Law, in New York would call “a written agreement with the customer that sets forth how much is owed, when it has to be paid, and how much interest will accrue on unpaid invoices”? You may not get far without something that at least resembles that. An article titled “6 Tips for Collecting on Unpaid Invoices,” on Small Business Bonfire (a “collaborative community for entrepreneurs”) makes the excellent, if elementary, point that the stronger your contract, the more likely you are, ultimately, to collect your money. Minus that document, it would be difficult for you to use the courts to collect what’s owed. Believe it or not, there are still plenty of contractors who consider a price written on a business card to be a contract.
Secondly, does your company have a charge on balances past due built into your accounting system? If it does, inform the negligent homeowner by mail or email that there’s a charge per month (name percentage) on that unpaid balance. Of course, if that homeowner is ignoring your requests for payment, chances are that he or she will similarly ignore whatever single-digit penalty you attach to the money owed.
Turn Up the Heat
With a signed document—that is, your contract—you’re in a good position to proceed, even though the whole situation is a huge annoyance. Nolo, the legal encyclopedia for contractors and other small businesses, advises that at some point you should step up collection efforts from letters to calls, and preferably those calls should come from the business owner. If calls don’t produce results, and the amount owed is small ("... between $2,000 and $7,500, depending on the state ...”), file in small claims court, a process that the website describes as “inexpensive and fairly quick.”
You can also outsource the process and turn it over to a collection agency. But don’t just hire any collection agency. (Note, there are 5,000 in the U.S.) Ashley Smith, at Business News Daily, advises that you look for an agency that’s reputable, that is, one that doesn’t engage in harassment or other illegal techniques that will taint the reputation of your business. In addition, you want a collection agency that's licensed and that belongs to an accredited industry association. “It is also important,” Smith notes, “to find a collection agency that is experienced, professional, and familiar with your industry.” So ask other contractors who they use, or have used.
Small businesses are far more likely to experience nonpayment than big corporations. That’s because a big corporation will have tried-and-true methods—a system—to ensure that every invoice gets paid. In 2012 The World's Longest Invoice website was created so that freelancers (including engineers, architectural designers, etc.) and small businesses that had been stiffed could put deadbeats on record. The site lists the size of the unpaid bill (ranging from $250 to $130,000), the name of the deadbeat, and the service rendered. Of course, public shaming may not matter much to those who are constitutionally shameless to begin with.
Commercial Capital says that the best way to avoid having to turn to a collection agency is to have a good system for getting delinquent payers to pay up, described as “one of the most tedious tasks of running a business.” In “The Best Way to Collect Unpaid Invoices, it describes a system for avoiding bad-paying clients, effectively managing collection calls, reducing disputes, improving cash flow, and using financing to help you eliminate unpaid invoices altogether.
Oftentimes the threat, or the hint, of legal action can make slowpokes, or those employing delaying tactics in the hope of avoiding payment altogether, fork over the owed money.
Florida construction attorney Bruce Kaleita suggests that, in the event of nonpayment, contractors immediately file a lien. “A contractor can lien for the contract price of materials furnished and labor performed,” he writes. He advises that you prepare a claim of lien and send it “by certified letter mail, return receipt requested.” This “can be very intimidating to the owner," he adds.
Let’s hope so.
The best way to manage unpaid invoices is not to incur them to begin with. But that's far easier said than done.