We all love to make sales. Land a big order or sign up a big new customer, and your business will turn into a money machine. Won’t it?

Maybe not. There are plenty of ways of not getting paid. The most common include:

You fail to bill completely and promptly, or fail to process incoming payments promptly.

Develop and stick with good procedures to keep this from happening.

You give accidental freebies (inadvertently sell more than you meant the price to cover).

Exactly what are you selling? Make certain your contracts place proper limits on what is sold and done. No contract should unreasonably restrain you from doing business with other customers. Your proprietary tools, ideas, procedures, or other trade secrets should be protected. Sell license rights instead of ownership, unless you truly intend to sell ownership. Sell only what you intend to sell, and give away only what you intend to give away. Your most valuable product may be intangible. You may not even realize you are selling what your customers regard as your most important offering. If you don’t realize you are selling it, you will inadvertently give it away free of charge!

The contract is invalid.

If you made a deal with someone who has no legal standing to make it, the contract is invalid and you cannot make them pay.

The contract is too loose. Liability and indemnification are inadequately bounded; or deliverables, acceptance mechanisms and time limits are not clearly defined; or invoicing and payment terms and timelines are vague.

Your attorney can probably devise adequate clauses for liability and indemnification, but will need your help to understand:

  • What you must deliver
  • How expenses (especially travel) are to be handled
  • What happens if you cannot fulfill your promises because of a dependency on someone else who falls short, or a disaster beyond your control
  • How your customer’s satisfaction will be indicated
  • What warranty you offer and what you are obligated to do if the customer is not satisfied

Collaborate with your attorney to make sure the contract is right. After the first in-depth collaboration, brief guidance to your attorney will probably be enough for most subsequent contracts.

Your customer disputes a bill.

If the aspects of the contract mentioned immediately above are thorough, the reason for any dispute over a bill can be readily pinpointed and resolved to clear your customer’s objection.

Your customer ages the bills, or takes undeserved discounts, or sends payments that are no good, or never pays.

Whenever you send a bill and then wait for payment, you are extending credit to the customer. Not all customers are worthy of that trust.

Aging the bills is a term for paying bills at the last moment before you would take an action the customer is unwilling to bear, instead of paying when bills are due. Organizations in a cash flow squeeze need to age their bills in order to survive. Many large companies age their bills even during good times. If a company normally ages its bills, it will age bills longer when its cash flow drops.

Offer incentive discounts only when you are sure your customer will reliably meet the terms for the discount before taking it. With the right customer, incentive discounts can encourage a customer to pay early, or in a desired manner such as electronic funds transfer.

With customers whose checks might bounce, consider requiring safer forms of payment. Typical forms of payment include: cash, certified or cashier’s check, traveler’s check, money order, personal or business check, wire transfer, electronic funds transfer, credit card, charge card, debit card, or cyberspace payment service. Choose payment types that fit the business relationship.

You lack an effective means to make a delinquent customer pay.

One of the most common business-killing mistakes is an assumption that customers will uphold their end of the bargain–and if they don’t, hiring a collection agency or taking them to court will solve the problem. In reality, both collection agencies and legal action are expensive last resorts that can become a bigger problem than the unpaid bill.

When a customer never pays, an intolerable consequence is your best way of wring out the payment. If you do everything else right but cannot impose intolerable consequences, you cannot make your customer pay. This tends to be a matter of business more than law. Perhaps the software you wrote begins requiring a license key 30 days after the final payment is due, and you will issue the key only after payment is in hand. For hardware, depending upon federal and state law, a critical hardware item (such as a fuse that is installed but removable) may be subject to repossession.

Your customer goes bankrupt or dies.

When your customer dies, you need solid documentation to present to the executor of the estate so your invoice will be among the bills and debts the executor pays from the estate.

When your customer goes bankrupt, the type of bankruptcy filed and the type of bill owed to you determine your priority with the bankruptcy court. Most ordinary bills from vendors are treated as unsecured debt. Everyone holding a secured debt (such as a mortgage) is higher in priority. Unsecured creditors may get only pennies on the dollar, months to years late. If your customer might go bankrupt, you may need to demand payment in advance.

Making sure you get paid is not a problem with a simple canned solution. You must integrate knowledge of your customers, behavior that encourages customers to take you seriously, clauses in your contracts and terms, procedures, and enforcement tools to make it happen.

If you want to know more, I published an entire book about this. It’s specifically intended to help small business owners. You won’t need a fancy business degree. Click here to take a look.