As a business owner or freelancer, one of the most common challenges you may face is getting paid on time. Late invoice payments can cause financial strain, disrupt your business operations, drain your energy and cause resentment towards your clients. It sits squarely in the "not so fun' aspect of entrepreneurship, especially if you're a solopreneur, who also has to wear the "collections" hat in your business. 

However, there are ways to mitigate this issue and get ahead of it before late payments become a major issue in your business. In this blog post, we'll explore these key aspects to help you not only foster better client relationships and ensure smooth and timely payments, but also help you not want to burn your business to the ground. #beenthere

Communicate Your Expectations and Policies 

You know it, but it's worth repeating: Effective communication is the cornerstone of your client relationship. When a client comes to me in my law firm, often they haven't even followed up with their client to let them know their invoice is late. When I ask why, it's usually because "it's in the contract" or "I don't want to deal with them."

Once you get a lawyer involved, the odds of saving a client relationship takes a major dive. Instead, it's always better to practice open and ongoing communication about your payment expectations. 

Setting clear expectations from the start is crucial. When you begin a project or provide your services, your discovery call can be a great time to discuss your payment expectations, which your client needs to understand is their responsibility.

Then, this conversation needs to be clearly reflected in your master services agreement (client contract).  This way, both parties are aware of the agreed-upon due dates and payment methods. Additionally, discuss potential payment obstacles upfront, such as any holiday periods or financial constraints that may affect timely payments. By doing so, you set the stage for a transparent and productive payment process and also show your client that this is a topic you take seriously, and are willing to have clear dialogue about from the get go. 

When It's Okay to Accept Late Payment

While timely payments are vital for your business's financial health, there are instances where accepting late payment might be OK. Life is unpredictable, and unforeseen circumstances may arise, affecting your clients' ability to pay on time. In such cases, you can choose to be flexible and empathetic.

Recognizing genuine financial hardships is crucial. If a client faces temporary financial challenges, consider offering them a reasonable payment plan. This approach allows you to receive partial payments over an extended period, easing their burden while ensuring you receive the full payment eventually.

Another option is to amend your contract to put the project or services on hold for a limited timeframe. This means you don't need to continue providing services while awaiting payment, your client can take a breather, and you also don't lose a client by having them terminate. This may or may not work for you depending on the situation and services you provide, but it may be an option that could work. 

Building trust with clients while maintaining professional boundaries is also essential. Sending tactful reminders about upcoming payment due dates can be an effective way to prompt clients without creating tension. Approach the situation with understanding, and if necessary, negotiate win-win solutions that work for both parties.

The Importance of a Great Client Contract

A well-crafted client service agreement is your best defense against late or missed payments. This written contract sets out the terms and conditions of your business arrangement, providing clarity and protection for both you and your clients.

A client service agreement outlines the scope of work and project milestones, ensuring everyone is on the same page regarding deliverables and timelines. It should also include clear payment terms and due dates, leaving no room for misunderstandings.

To discourage late payments, consider including late payment policies and penalties in the agreement. These measures act as incentives for clients to pay on time, as they understand the consequences of not doing so. Remember, in Canada you can't impose late fees or interest if it's not clearly set out in your contract from the start, so keep this in mind if you want to impose any kind of interest or penalty for late payments. 

Avoiding Common Payment Pitfalls

When it comes to payment processes, several common pitfalls can hinder smooth transactions. Be mindful of these pitfalls and take proactive steps to avoid them.

One of the most significant pitfalls is having vague or conflicting clauses in your client contract. Ensure your agreement covers all relevant aspects of your business relationship and leaves no room for misinterpretation.

I am also a big fan of collecting a retainer up front and holding it to be applied against the final invoice. This ensures you always have at least a bit of a financial buffer in the event you complete services and your client fails to pay. Chasing down a client for late payments can be expensive, and often the costs outweigh the outstanding amounts. The retainer can come in handy to help you mitigate at least some of your losses. If you do collect a retainer, your contract should clearly set out that it would be used against any outstanding amounts. 

Lastly, remember if your client hasn't paid their invoice, you shouldn't continue providing work. If you've let your client get away with this for too long, it's likely time for an email letting them know that you won't tolerate it anymore, and services will not be provided until paid for in full. Obviously, you can word this in a strict but friendly way if you wish to keep working with this client. 

Thank You, Next. 

If you find yourself always chasing payments down, sending "friendly" reminders and doing everything you can to ensure timely payment, it might be time to fire your client. 

Sometimes, the "squeeze ain't worth the juice" and it might be time to say goodbye to that client, and open up space in your client roster for ones that respect your time, work and policies. 

Wrap Up

Chasing late payments is a serious drain on your resources and the resentment around it can be seriously toxic for your business.  Getting in the habit of timely and clear communication and clear payment terms in your master services agreements will support you if you find yourselves having to deal with this kind of bad client behaviour.  By implementing these strategies and best practices, you can navigate payment challenges with confidence, foster strong client relationships, and ensure the smooth running of your small business or freelance venture.

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Contracts Market is not a law firm and while Jaime Bell is a lawyer, she is not your lawyer. This blog post is intended for informational and educational purposes only. If you need legal advice related to your business, you should reach out to a lawyer or attorney local to you.