Unpaid invoices are a fact of life for agencies. While every situation is different, there are lots of things an agency can do to maximize the likelihood of collection. These strategies can help avoid a problem entirely or help ensure that a small problem doesn’t become a big one. Use this post as a checklist for avoiding or dealing with your next problem client.

Show Me The Money

The proposal stage is often where price and payment terms start to be defined. So in your next proposal, work to get some or all of the fee in advance (you can’t have a payment problem if you already have the money).

If you can’t get the entire fee in advance, work for a big deposit. When negotiating price, use a pricing grid to incentivize payment in advance (think premium prices for delayed payment, standard prices when paid in advance). You can also use a pricing grid to incentivize other agency-friendly payment terms:

Payments at Start of Each Phase. Negotiate for installment payments to be monthly in advance (like rent) or at the beginning of each phase of work. Both of these strategies minimizes the amount of time your agency spends waiting for payment.
Frequent Invoicing. Often, your first indication of a problem is an invoice going unpaid. So, maximize these early warning indicators by invoicing every two weeks (or weekly) rather than monthly. Not only will you have earlier indication of a potential problem, but also the problem will be smaller.
Shorter Payment Terms. Like frequent invoicing, setting the due date for your invoices at 14 days (rather than 30) highlights a potential problem earlier so you can take steps to prevent it from becoming bigger.

These strategies are especially effective when used in combination. Can’t get payment in advance? Ask for a large deposit coupled with invoicing every two weeks and payment due in 14 days. Client reluctant? Use a pricing grid to show how your price will be higher if they require longer payment terms.

Get Payment Terms in Writing

Once you’ve negotiated basic payment terms in your proposal, there are lots of things you can do in your contract to create levers that you or your lawyer can pull to motivate payment.

No Ownership of Deliverables Until Paid For. Make sure your contract says that your client doesn’t take ownership of a deliverable until it has been paid for. In a dispute, it can be quite motivating to remind a non-paying client that they can’t use the logo you designed or code you developed until it has been paid for.
Make Payment due on Delivery (not Satisfaction or Acceptance). One key to avoiding payment disputes is by ensuring that the trigger for your client’s payment obligation is unambiguous. Do this in your contract by tying payment obligations to dates, invoices, or deliveries instead of the client’s “acceptance” or “satisfaction”.
Preserve the Ability to Stop Work Upon Client Breach. Nothing motivates a client to pay like the threat of a work-stoppage. Your contract should be clear that you may stop work if a client fails to make a payment when due or otherwise materially breaches the contract. This clause should also make clear that restarting work is subject to your availability once they fix the problem.
Preserve the Ability to Terminate SOW Upon Client Breach. Like stopping work, the threat of termination can be very motivating. You should have an unambiguous right to terminate if a client misses a payment.
Interest on Past Due Invoices. Make sure your contract states a meaningful interest rate that accrues if the client doesn’t pay: In the current economy, 18 – 24% per year isn’t unreasonable. Interest can add up quickly when payment disputes carry on, or in the worst case, become a lawsuit.
Legal Fees Clause. Speaking of lawsuits, if you need to bring one, it will be expensive. Under US law, you aren’t allowed to collect legal fees in a lawsuit unless your contract says so. The threat of having to pay legal fees can be an important tool in resolving a dispute prior to litigation.
Local Venue. Down toward the bottom of your contract there is generally a clause that says where a lawsuit (or arbitration) must be fought in the event of a dispute. Specifying that your local courts are the exclusive location for resolving disputes can be important leverage in encouraging payment.

If you’ve taken some of the steps above, you’ll be in the best position to respond once payment is missed on an invoice. Let’s talk about what to do when that day comes.

Don’t Wait, Act Today!

The problem we see most often is when an agency responds to non-payment by … doing more work, quietly hoping the problem will resolve itself. I think this “strategy” is a combination of the agency both not wanting to have a difficult conversation and also thinking that if it keeps taking care of the client, that eventually the client will take care of the agency (and pay). Unfortunately, this is just the beginning of an abusive business relationship.

Unpaid invoices aren’t like fine wine: age doesn’t make them better. In fact, time is the enemy of collection. Prompt action (like prompt invoicing) is key to getting dollars in the door and preventing small problems from becoming big ones. So use this playbook the next time an invoice goes unpaid.

Contact the client the first day payment is late. Talk to them. See what the problem is. Is the check in the mail? If so, why wasn’t it sent to meet the deadline? If they are “sending it today”, ask for a tracking number on the envelope. If they won’t send today, why not? Key at this stage is to listen for information to evaluate your risk. Their answers may reassure you or their answers may sound like baloney.

Either way, make clear in that conversation that if you don’t receive payment by [date] (the next few days), that you may need to stop work. Gently remind them of the clause in your contract that allows this. Remind them that stopping work will delay the project and that restarting work is subject to availability once the payment is received (potentially further delaying the project).

You don’t have to be a jerk on this call (and yes, do it as a call with a follow-up email). Just be firm and clear:

Hi Client. This invoice was due Monday. It’s Wednesday and we still don’t have payment. I want to get this resolved so a small bump doesn’t turn into something larger. If we don’t have payment by Friday, we will need to stop work until payment is received. Remember that your project will be delayed until we can get payment sorted and restarting work is subject to our then-existing availability.

Feel uncomfortable doing this? You might the first time or two.. It isn’t because you are doing anything wrong. Rather, it’s just sometimes difficult to tell a client (or anyone for that matter) “no” or to impose consequences.

I can hear some of you already. “We can’t do that! We are all about client service!” That’s great! You should be. But imposing pre-agreed consequences for non-payment doesn’t mean you aren’t client oriented. Quite the opposite. By imposing consequences for a non-paying client you are preserving your ability to be service-oriented for all your other clients (as well as your ability to pay your employees).

While you are waiting, stay on top of them. Follow up a few times per week. The squeaky wheel gets the grease.

At this early stage it might be appropriate to register the copyright in your work. A registered copyright entitles you to enhanced statutory damages and legal fees in the event of litigation. That threat can often be quite motivating to getting payment in the door. Be sure to consult with your lawyer about registration and potential challenges in doing so.

What if the Client Still Won’t Pay?

If non-payment goes on for a month or so despite stopping work and follow ups, it may be time to escalate. At this stage, often what you see is a more formal demand from you (with a cc: to your lawyer) or a demand directly from your lawyer. This letter will outline the full scope of potential consequences in addition to the missing payment: inability to use deliverables, potential infringement, termination, legal fees, interest, etc. It will also describe potential next steps if payment isn’t received. Your lawyer can help strike the right balance for this letter.

What NOT to do during this phase? Don’t automatically take down assets that are already in a live environment, even if you are technically able to do so. Don’t disable client access to their own accounts. You might be able to remove assets from your own accounts and repositories, but check with your lawyer before doing so. Prematurely removing assets or removing the wrong assets can sometimes escalate a problem without providing much benefit.

Still being ignored? From here, if the amount in dispute is less than the small-claims threshold for your local courts, that may be a viable option. Unlike emails and demand letters, filing a lawsuit, even a small-claims lawsuit, can’t be ignored without consequences.

If the amount is larger, have a real conversation with your lawyer about collection options. Maybe that means a lawsuit or selling the receivable to a collection agency.

What’s Next?

The unfortunate reality is that lawsuits for amounts less than $40,000+ are a difficult cost/benefit proposition once you factor in the lost time, uncertainty, and agony that pursuing litigation brings.

This reality just reinforces the importance of the steps taken in negotiating the fee, setting the contract terms, and responding to the initial problem. No doubt, these steps can be difficult. Consult with the team at Matchstick on how to respond the best way possible to your next payment dispute.