In many businesses, you run the risk of getting totally shafted by your customers from time to time — where you deliver a great product or service and then they skip town and they somehow get out of paying (either by ignoring your invoice or doing a credit card chargback).
It sucks. And it happens to a ton of businesses.
I keep a list on my computer of delinquent receivables and every now and then I have to add someone else to it. Just today, I’ve added someone else to that list. I’m not embarrassed to admit it because it happens to most businesses.
Each time I add someone to the list, though, I get a little smarter. I make sure that I learn from the shafting and it keeps me from losing money in the same way again.
Here are seventeen ways that you can avoid getting shafted by your customers. (I realize not all of these will apply to every business but many of them will apply to many businesses so take what you can)…
1. DO YOUR DUE DILIGENCE
Spend a few minutes and research your prospective customer before you sign them as a customer. What are people saying about them? That less cost me $1,000 several years ago. I did a bunch of work for a client and then wondered why he never answered my phone calls or emails. I Googled his name and his company name for additional ways to contact him and what do you know, there was a bunch of info about him not paying his other bills. Customers do due diligence on you; there’s nothing wrong with doing due diligence on your customers.
2. BE WORRIED IF THEY ARE HOUNDING YOU BEFORE BECOMING CUSTOMERS
Before your customers become customers, there is usually some back-and-forth about the project. But the prospective customers you really need to be worried about are the ones who are hounding you a lot. Hey, some hounding is good because maybe it means that they like you and really want to work with you. But in my experience, the customers who hound you the most (before becoming customers) are the ones who wont pay. They desperately want to work with you and will email you every day to find out when they get started.
3. AGREE ON AN OUTCOME
Clearly define the project. Before the project starts, clearly outline what each of you consider to be a successful outcome and what the timeline will be. This will help arguments at the end of a project about what you should be paid for. This was a lesson for me several years ago. I wrote an ebook, delivered it as promised, and the client said “my needs changed and I don’t need the ebook any more. But because you did all that work, I’ve decided to only pay you 50% of what we agreed.” Clearly, I failed to identify the requirement that the completion of the ebook is what will trigger full payment, not concurrent changes to my customer’s business strategy.
4. GET PAID UP FRONT
Receive the cash in hand BEFORE you start work. Yeah, this might seem like a no-brainer to some but not every industry requires it and every entrepreneur needs to find the balance between asking for money up-front and losing customers to those who invoice at the end of a project. I invoice MANY of my customers at the end of the project and my delinquent accounts receivable account for less than less than 1% of my income so that’s a risk I’m willing to take. If my delinquent accounts receivable percentage increased, I would make a change.
5. GET CASH FLOW
If you can’t ask for all of the money up-front, create milestones and get paid on each milestone. This won’t eliminate all shaftings but it will minimize the damage from any one shafting. Plus, you’ll like the cash flow too!
6. WATCH OUT FOR CHANGING TIMELINES
Remember earlier I said prospective customers will hound you? Well my most recent lesson (for the customer I just added to my list today) is one whose timeline that accelerated and decelerated as badly as my father-in-law does when he’s driving. When the project was in my hands, my customer was always hounding me for it. (That’s okay, I don’t mind a little of that). But when the customer was reviewing the project, his timeline went from days to weeks. Then it was back to me for daily hounding and then back to him and I wouldn’t hear from him for a couple of weeks. The same thing seems to have gone on with the invoice. Oh well.
7. BUILD A FILE ON YOUR CUSTOMER
While doing your due diligence, capture all the contact information you can and build a file. The file is a useful tool in general to have. You can get in touch with your customer easily and you might even find additional businesses and websites that you can help your customer with. But when they don’t pay, you also have a useful stack of information to call them with. Way back when I was a sales manager, I did this too. And my delinquent customers became very likely to pay when I knocked on their door. (That makes me sound more intimidating than I meant it to. I just mean that customers can ignore answering your call but they can’t just move their home).
8. BE STRICT ABOUT WHAT YOU GIVE AWAY
It’s good to provide lots of value to your customers… but it’s bad when you do that instead of making money. Chances are, you give lots of stuff away so be careful about how much more you give away to customers. Years ago, I had a customer who I wrote something for and then threw in a quick free project. They were appreciative. Before long, they were only asking for that free project and weren’t sending me any more paid work. They couldn’t quite figure out why I stopped working for them. Just recently, I negotiated a buy-something-get-something-for-free deal with a client who then started demanding the free thing first. Dropped him before I did any work for him.
9. BUILD A RELATIONSHIP WITH YOUR CUSTOMERS
Build a relationship with your customer. Help them to feel like they are not only your customers but also your friends. Sure, friends screw you sometimes, too, but they are less likely to if they know that their delinquency will steal food from your kid’s mouth. Connect with your customer in other places — online and offline — and you’ll dramatically reduce your likelihood of getting shafted.
10. START ON THE NEXT PROJECT BEFORE THE FIRST ONE IS DONE
Customers who don’t pay do so because they hold all the cards: They have your product or deliverable and you can’t get it back. If you start working on their next project, you not only gain extra business for yourself but you also give them a reason to pay you so they can continue on their next project.
11. CUT YOUR LOSSES
While working on a project, you might realize that your customer is not going to pay. For whatever reason, it becomes apparent. (Maybe you do some late-in-the-game due diligence or maybe your gut just tells you or maybe you have a milestone that they haven’t paid yet). Stop the project. Stop working with them. Drop them. Focus your efforts on a different customer.
12. HAVE MULTIPLE EXIT STRATEGIES
Your products and services are an investment of your time and skill and you hope for a return on that investment in the form of payment. Like any good investment, it’s important to have more than one exit strategy… just in case. This won’t be possible all of the time but there will be situations when you can re-sell the product or deliverable you couldn’t collect on, or perhaps you could use it in some other setting (such as a marketing piece).
13. FOLLOW UP ON TIME
Being an entrepreneur is fun and creating and busy! There are always a million things you could be doing and administrative work like sending out invoices is not always fun. But the longer you leave your invoices, the easier it is for your customer to avoid payment. Over time, they forget about the great relationship they have with you and the high value that your product and service gave to them. Weeks later when they get the bill, all they have is a bill… and a distant memory that they interacted with you in some way.
14. BE RELENTLESS
Before the customer became a customer, you might have stayed in touch with them regularly. But afterward, their emails dry up and so do yours. Stay in contact with them because avoiding payment is just another type of sale! It’s you selling the customer on why they should pay and it’s the customer selling you on why you should write that receivable off! Stay in touch. Put a note in your schedule to follow-up regularly and increase the heat as time goes on. Use different methods of contact (in case they filter your email directly to Trash)
15. WATCH FOR WARNING SIGNS
Non-paying customers have warning signs long before they ignore your invoices. I wish I could tell you what all of them are but I think it’s different for everyone and you’ll learn what they are pretty fast. In general these are the warning signs (but this is certainly not an exhaustive list nor are these warning signs exclusive to delinquent customers. These are just my own observations about what a typical non-paying customer is like): Pre-project hype and passion; lots of conversations and email asking you about the project and when you can get started; a lack of detail about the project itself; no established business, website, etc.; a lack of professionalism; a lack of response when they have a specific responsibility to fulfill; cliche excuses; excessive complaining about others; doesn’t flinch at your price. There are probably other signs and certainly one or two of these on their own doesn’t indicate a non-paying customer.
16. TRUST YOUR GUT
You will know ahead of time when someone won’t pay. You’ll know it. You can figure it out over time. Your gut will tell you that you have a problem customer and, if you don’t know what the problem is during delivery, you’ll figure it out soon enough when the invoice goes out. These are difficult customers to cut loose BEFORE they become customers but remember that it’s your business and you don’t have to serve everyone. Find a professional way to tell customers that you aren’t able to serve them.
17. FORGIVE BUT DON’T FORGET
It’s frustrating when customers don’t pay. You deserve to be paid and you know that THEY wouldn’t like it if THEY didn’t get paid. It’s really tempting to do something nasty. Write a mean email to them. Maybe post an angry comment on Twitter. Maybe pretend to be a dissatisfied customer on Yelp. Maybe Maybe leave a nasty review on their Amazon account. These things won’t help. They’ll feel cathartic for a season but they’re just bad business and they might come back to haunt you in some way. Forgive them and let karma kick them in the stomach instead of trying to do it. Forgive… but don’t ever forget! Keep a record of your losses and refer to it periodically. You might get some customers paying you back (it happens!). You’ll be reminded of your risk management techniques that it’s easy to become soft on. And you’ll have a handy list when they come calling for more work (it happens… I’m actually surprised at how often it happens).
Most businesses will have customers who don’t pay. It totally sucks. But that shouldn’t stop you from running a business. Follow these 17 ways to avoid getting shafted by your customers and you’ll keep the cash flowing in.