Your business is humming along. You’ve been adding clients, increasing your billings, and cranking out top-quality work. There’s only one minor detail – your bank account is as empty as your average pop star’s brainpan. All those gigs won’t help you eat unless you convert your accounts receivable into cold, hard cash.
For a freelancer, the art of collections is almost as important to master as the art of selling. Let’s face it, while it would be nice if all of your clients paid up front (or failing that, on time), in this economy, that’s about as likely as the Cubs winning the World Series (and let me tell you, your landlord is not going to be amused if you tell her, “just wait until *next* year.”
If you want your money, you’re going to have to go out and get it. Fortunately, collecting on debts doesn’t mean you have to get all Tony Soprano on your clients. For one thing, you probably won’t win too much repeat business if you run around breaking kneecaps. With a little discipline, you too can learn to collect in an organized, professional, and most of all, effective manner.
1. Assess the Creditworthiness of Potential Clients
The easiest way to collect is to avoid taking on deadbeats to begin with. Before you extend credit to a client, assess its creditworthiness. For public companies, this means checking some basic information like, “Is the company profitable? If not, how long will its current supply of cash last?” I use Yahoo! Finance’s company “Profile” feature as a quick-and-dirty research tool. For example, a quick check of Microsoft reveals that not only is the company profitable, it has $43.4 billion in cash. That’s a good credit risk.
For private companies, this research can be more difficult. If you can get credit references, do so. If not, at least check F*ckedCompany to make sure that your potential client isn’t busy defending itself from a bevy of SEC investigations and fraud lawsuits. No matter what, assess whether or not the potential client has a viable business. Not only is this a good way to assess creditworthiness, it also tells you something about your chances of gaining follow-on sales.
2. Keep Good Records
Okay, so you’ve made the sale. Your new mantra should be, “Get it in writing.” If you can’t prove that you’re owed compensation, good luck collecting. Get a written contract. If you can’t afford a lawyer, Quicken Business Lawyer is faster and cheaper (as little as $10) than the real thing. Do your bookkeeping, including making sure that you have up-to-date contact information. QuickBooks is the standard for small businesses (though I’ve known companies that went IPO on QuickBooks), and costs less than $100 with rebates. Create a paper file on each of your accounts, and keep every communication–verbal, written, or electronic–on file. Bottom line: record-keeping is a pain, but so is losing thousands of dollars that could otherwise be in your bank account.
3. Send Invoices
It sounds silly to even mention the need to invoice, but it’s not. At one company, I discovered that the accounting department had never sent a single invoice. And I had wondered why our accounts receivable had been growing! Remember to confirm the contact information (including whether the person listed as the primary contact is still working there) on a regular basis to make sure that your invoices actually end up in the right place.
4. Call Before the Due Date
It’s best to avoid ever setting the precedent of late payments. Call your accounts receivable before they’re due to remind them to pay. Think of it as the accounting equivalent of flossing – a few minutes up front can prevent hours of root-canal agony later on.
If you’ve followed steps 1-4 and your client still hasn’t paid, it’s time to shift into serious collections mode:
5. Get Personal Contact Information
You should already have basic contact information from your recordkeeping. What you need now is the advanced stuff. I like to get home phone numbers for the relevant managers and employees. Cell phone numbers are even better. A person who is evading creditors may never pick up their work phone, but their home and cell phones are another story. Home addresses are also good (strictly for correspondence; I can’t imagine anything more ill-advised than going to a debtor’s home to collect in person!). Obviously, your accounts are going to be reluctant to give out this information. You can usually get a cell phone number by calling the front desk when a person isn’t picking up their phone. Just ask for their cell phone and cite “urgent and important business.” For the home phone and address, you can often use online directories such as SuperPages to look them up name and city. I’ve used both of these techniques quite successfully for my collections activities.
6. Make Collections a Daily Task
Collections require a disciplined and ongoing effort. I’ve found that the easiest tactic is simply to spend a little time each day on collections. I like to call in the mornings, when I’m fresh, and people are less likely to be out of the office.
7. Be Persistent, but Polite
I’m sure you’ve heard the old saying, “The squeaky wheel gets the grease.” When I collect, it’s my job to squeak without incurring the wrath of my debtors. You see, businesses have a lot of leeway on who they choose to pay. If an accounts payable manager decides that his life will be easier without hearing from you every day, he can move your bills to the top of the stack. Conversely, if an accounts payable manager decides that he’d rather make your life hard, he can bury your bills at the bottom of the stack. Be persistent, but be polite, and always treat your accounts with respect.
8. Offer Terms
If an account offers objections such as “But we don’t have enough money,” offer terms. Naturally, it’s better to collect the full amount of your invoices right away, but anything is better than nothing. Even if you’re only getting $100 per month, you’re still getting $100 per month.
9. If All Else Fails, Show a Willingness to go to Small-Claims Court
Unless you’re trying to collect $20,000 or more, it’s not going to make economic sense to hire an attorney and sue. You know it, and your debtors know it. Threatening to sue on a $5,000 debt simply shows that you’re bluffing. On the other hand, it can make economic sense to pursue a claim in small claims court.
Small claims court (at least in California) covers disputes of less than $5,000. Filing is cheap ($22), and you’re guaranteed your day in court (with no lawyers allowed!) in less than 40 days (70 days if you’re suing someone in a different county). If you show you’re your willingness to take a debtor to small-claims court, he will know that you are serious and think long and hard about paying up (and if he doesn’t, your good records should make yours an open-and-shut case).
When I was in college, one of my friends successfully sued a deadbeat business in small claims court, won a judgment, and finally got the Palo Alto Police Department to seize the deadbeat’s cash register until payment was made.
Becoming successful at collections takes more than a lead pipe or brass knuckles. It takes discipline, attention to details, and persistence. Once you master collections, however, it can become an essential part of making your business a financial success.
Chris Yeh is a partner at Porthos Consulting, a sales and marketing consultancy that focuses on delivering measurable gains in lead generation and revenues. Chris and his work have been featured in Fortune, the Financial Times, and the New York Times. He earned his MBA from Harvard Business School.