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As a business owner, delivering your products or services on time is only half the battle—you also need to ensure you get paid. But what happens when a client fails to honor their financial obligations? A major factor that can hinder your ability to collect unpaid balances is often rooted in contracting, due diligence, and intake practices.
Here are essential tips to safeguard your business and improve your chances of successful collections:
1. Start with a Solid Contract
A written contract is your first line of defense. A vague or poorly drafted agreement leaves room for disputes and delays in payment. Ensure your contract includes:
Clear Payment Terms: State payment amounts, due dates, accepted payment methods, and late fees. Consider adding an acceleration clause for unpaid balances.
Service or Delivery Address: Ensure the contract includes a verified physical address for service or delivery, not just a P.O. Box.
Default Provisions: Outline what happens if a payment is missed, including late fees, interest, or the right to suspend services.
Governing Law and Jurisdiction: Specify which state’s law governs the agreement and where disputes will be resolved. This avoids uncertainty when it's time to collect.
2. Ensure You’re Contracting with the Right Entity
One common pitfall is unknowingly contracting with a non-existent or dissolved business entity. Before signing any contract, do some basic research on the client:
Entity Status: Confirm the business is active by checking with your state’s Secretary of State website or database. You can usually search by the business name or registration number to verify whether the entity is still in good standing.
Name Consistency: The name on the contract should match the name registered with the state. If not, the contract may not be enforceable against the business.
Personal Guarantees: When dealing with small businesses, request that an owner or principal sign a personal guarantee, which makes them personally liable for unpaid amounts.
3. Conduct Due Diligence Beforehand
Avoid costly surprises down the road by conducting due diligence before entering a contract:
Client Credit Check: For high-value contracts, run a credit check on the client or ask for financial references to assess their ability to pay.
Background Check: Ensure the individuals you’re dealing with have no history of bankruptcy, fraud, or financial instability that could affect their ability to meet payment obligations.
References: Ask for and follow up on client references, especially if you’re entering into a long-term business relationship.
4. Develop a Comprehensive Intake Process
A strong intake process sets the foundation for ensuring smooth collections:
Complete Client Information: Collect full legal names, contact information (phone, email, and physical address), and the registered business address of any company you're contracting with.
Verified Contact Details: Confirm that the client’s physical address is legitimate and not just a temporary space or P.O. Box, which could make serving legal documents difficult if things go wrong.
Deposit Requirements: Consider requiring a deposit upfront before starting services or delivery. This ensures you have some financial security, especially if the contract is for a large amount.
5. Regularly Review and Update Agreements
If your client relationships evolve or the scope of services changes, don’t rely on informal agreements or email threads. Make sure to update your contracts to reflect these changes and reaffirm the original payment terms.
6. Use Service of Process Best Practices
When collections require legal action, ensuring proper service of process is crucial:
Correct Service Address: Make sure your contract identifies the correct individual or company representative who can accept legal notices.
Registered Agent: Know who the company’s registered agent is for service of legal documents and make sure you serve any official notices properly, especially when dealing with LLCs or corporations.
7. Work with an Attorney Early
If a client starts missing payments, don't wait too long before seeking legal counsel. A demand letter sent from an attorney's office carries weight and can often encourage clients to settle their debts without the need for litigation.
By addressing these issues in advance through proper contracting, due diligence, and intake practices, you can significantly improve your ability to collect when clients don't pay. Preparing for these situations proactively protects your bottom line and ensures that your business remains financially secure.
If you need help drafting solid contracts or ensuring your collections practices are airtight, reach out to Shannon Davis Legal for assistance.
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