Recently, there was a great discussion in the Bureau Slack on how to handle late payments. It got me thinking about how many times I had to "make the call" to a client and ask what the holdup was. Sometimes, it was legit, and sometimes, they were playing games. But every single time, I got to decide how I was going to act. And you get to choose the same. So read on and hear what the community and yours truly think about clients who miss payments.
It’s Billing Day! Make Them Pay!
When is a payment “late”?
Different people have different rules for deciding how late a payment could be before they stop working.
For new clients, the grace period might be just a week. Others are more flexible with clients they know well, sometimes allowing up to 60 days. But it depends on your client vertical (government, anyone?) and your company’s cash position. It’s easier to cut someone a break when you’re flush, but you won’t have that cushion for long if you do it too often.
Should you offer a Grace Period?
Some members give clients an extension if they have a history of paying on time, some allowing up to 30 extra days. However, new clients with no payment history should be handled very carefully.
We had a big credit card client who asked for a 90-day extension at the end of the year, aka the holidays and bonus season. We agreed but with a 12% interest rate, which was the rate they charged us on our corporate card. They laughed and said why? I told them that we weren’t the bank.
Effective Policies
Clear communication and contracts are crucial. One common approach is calling clients when they are ten days overdue and sending a formal reminder at fifteen days. This is especially important for 1099 contractors, where any delay can quickly affect their finances. But most importantly, you must stick to your policy and stop working when you said you would.
For us, if a client was five business days late paying, we would send them a warning. At ten business days late, we quit working. They knew it, we knew it, and as a result, it very rarely happened.
Many shops, ourselves included, always worked off of cash we had already received so that it wasn’t a collections issue when we hit the brakes. The client made an upfront deposit, and we'd bill monthly for each upcoming month in advance. We called it the apartment rule—last month’s rent upfront.
Making the Call
Evaluate the relationship and payment history before deciding what to do. Use reminders and follow-up messages to address late payments. When deciding to stop work, consider the impact on your cash flow and the client relationship. It's different every time, but there's one constant. You have to treat yourself like you belong at the table. Or nobody else will.
One of the things I learned early in my career was that nobody will respect you if you don't respect yourself. And that is never more true than in getting paid what you deserve and when you deserve it. So be a good human and help others out when warranted, but don't sacrifice yourself or your team in the process.