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How to Get Yourself Paid

What to do when deadbeat debtors refuse to cough up the cash

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In a recent column, I described ways to prioritize your debts and deal with your creditors when there isn't enough cash to go around. My advice generated a pile of mail, most of it objecting to my suggestion that some bills just won't get paid if things are tough. This column is for those on the other end of the stick--small businesses that are owed money and are having trouble getting paid.

When you run your own business, it is inevitable that, sooner or later, someone will start making payments slowly, or not at all. Sadly, there are some people out there who will flagrantly breach their contracts if they think they can get away with it. Even nice, ethical business owners can get themselves into situations where there just isn't enough cash on hand to make everybody happy.

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The best time to avoid bad customers is right upfront, before you start doing business with them. Your customer agreement should state clearly and precisely:

  • When payment is due
  • How payment is to be made (for example, by check or wire transfer to your bank account)
  • What will happen if payment is not made in timely fashion (for example, you have the right to cease working, you have the right to repossess what you've sold them
  • That interest at a penalty rate (3 or more percent over a bank's prime rate) will accrue and be charged on any overdue payment.

It is amazing how many contracts are silent or vague on these essential points.

So now, despite your best efforts, it has happened: one of your customers has started paying slowly, or has stopped payments altogether, or is claiming that he is waiting to get payment from someone else and then he will pay you promptly. What do you do now?

Whether or not you are willing to negotiate with the debtor, you are not likely to get anywhere unless you first get the debtor's attention by demonstrating that he ignores his obligation to you at his peril. If you still are providing goods to a financially troubled customer on a regular basis, or if you are in the middle of a big project for a troubled client, the first thing you should do is stop. Big debts almost always start out as little debts, which become bigger and bigger as a business frantically keeps working for the customer in the vain hope that the situation will turn around. In the meantime, the business ignores other customers who are ready, willing and able to pay their bills on time.

If you have no leverage over your delinquent customer, you must become one of the "squeaky wheels" that gets their attention. Most debtors will find a way to pay off a creditor they fear, or who makes a bloody nuisance of themselves, especially if the debt amount is small.

You should not hesitate to call your debtor frequently and persistently until they respond. The federal Fair Debt Collection Practices Act and related state laws provide some guidance on what you can and cannot say in a collection call. A lot of these guidelines, however, apply only to collection agencies and consumer debts and do not prevent a small business from aggressively pursuing its own debt, especially if the debtor is another business.

You may threaten to file a disparaging report against the debtor with the major credit bureaus, as long as any such report is 100 percent true and accurate. If it isn't, your debtor may be able to sue you for libel, slander or violation of fair credit reporting laws.

Have your attorney send a "demand letter" stating your intent to sue the debtor if something isn't worked out to your satisfaction by a certain date. If the debtor is located in a faraway state, hire an attorney in that state to send the letter so the debtor knows you are willing to pursue him on his own home turf. Better yet, have your attorney send a draft summons and complaint (an actual court document) with the letter, and a demand for response in seven to 10 days in order to avoid litigation.

Finally, be prepared to sue, even if it's in small claims court. Of course, there is no guarantee you will win, but troubled debtors can usually tell if you are bluffing when you threaten to sue, and it's amazing how quickly their attitude adjusts when court papers are actually served. Make sure they know you are willing to make everyone's lives (including your own) miserable until you receive satisfaction.

In avoiding bad debts and problem customers, it's always best to remember the advice my immigrant grandmother once offered to me: "When you are dealing with people you do not know well, assume the worst; that way, any surprises you have will be pleasant ones."

Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at E-mail him at

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Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.