As a small business owner, your ideal client pays on time, every time. But, that’s not always the reality. Late and missed payments make more work for you. They also impact your cash flow.

So, what can you do to encourage clients to pay on time, and what should you do with the ones who don’t?

In this resource, we’ll break down the basics of accounts receivable and debt collections.

What is accounts receivable?

Accounts receivable is the amount of money a client or customer owes to a business for a product or service that they (the customer) received, but didn’t pay for. This occurs during a “credit period” which ranges based on the deadline you set to accept payment by.

Accounts receivable is used to describe:

  • Clients who have passed payment deadlines
  • Accounts that have outstanding balances until they have been paid.

Example, if you mow a customer’s lawn on June 1st, and give them until June 30th to make a payment, their account would be considered in accounts receivable until a payment was made, even if made a payment on June 27th.

Note: Accounts receivable only refers to clients who owe you money for a job that you did.

Quotes or estimates for work that hasn’t been performed doesn’t qualify as accounts receivable.

For example, if you provided a quote to a client for a lawn care service, but they never followed through, they wouldn’t be obligated to make payment to you. This wouldn’t be considered accounts receivable.

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What is debt collection?

Debt collection is the process that you follow to collect past due payment for a product or service that you provided to a client. It can involve payment reminders, late fees, interest charges, phone calls, liens, and more.

Unlike accounts receivable, debt collection is reserved for clients who did not pay you by the requested payment deadline.

Most debt collection can be handled by your business as long as you create a legal and straightforward process to follow.

Occasionally, you may need to hire a collection agency to try to recover the money owed for you. You may even have to go to small claims court as a last resort.

Dealing with customers during a crisis?

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When should an account go to collections?

When you send a client’s account to collections is ultimately up to you. But, there are some standards that you can follow.
Many businesses have a 90-day process in place, that is often structured like this:

  1. After 30 days of non-payment: the client will start to receive phone calls, emails, or letters requesting payment. These letters are often worded like payment due reminders.
  2. After 60 days without payment: the account is officially moved to in-house collections. The client will continue to receive letters, phone calls, texts, and emails, but they are worded as requests to pay as opposed to reminders.
  3. After 90 days without payment: the account is given to a third-party collection agency or sent to small claims court.

You may also decide to move a client to collections if they become unresponsive in the middle of a job, or don’t meet their payment milestone obligations that were agreed upon and outlined in the contract.

The time period above can be flexible. It’s up to you to decide what timeline works for your business.

As a general best practice, you should give clients 30 days to make payment after a job has been completed.

Best practices for overdue accounts receivable

There are a few things you can try to help you get paid when a debt is officially moved to collections. It’s critical that you do your best to maintain your client relationships at this time.

Have a bird’s eye view of payment tracking and timely client communication

Debts can become a problem when your clients are not on top of their bills. Some of that is out of your control, but keeping in touch with your clients and knowing when they owe payment is within your control.

Payment tracking and an automated invoice reminder system can help you stay on top of your accounts receivable at all times. Software can give you more insight and power into what stages your payment milestones are at, and send your clients payment reminders while you’re focusing on other important tasks at hand.

That way, you’re in control and accountable for communicating with clients when they haven’t paid yet, or have overdue bills.

It’s important to do everything you can to remind your clients about their bill payments. Staying organized is part of your responsibility as a business owner.

Keep a paper trail for each client account

If you do end up in small claims court, you’ll have to prove that a debt was owed to you and that you did your best to accommodate the client while trying to collect payment.

Keep records of:

That’s easier said than done. But, if you use Field Service Management Software like Jobber, it can be a whole lot easier to track and maintain.

Involve your lawyer

Involve your lawyer early in the process. Sometimes, all it takes is a Demand Letter requesting payment to get a client to clear their outstanding debt.

Bringing in your lawyer in at the beginning can be beneficial if you need to pursue payment in small claims court down the line.

Review each debt individually

Remember to handle collections on a case-by-case basis.

Sometimes, overdue payments have simply been overlooked. In other circumstances, you and your client can resolve a debt by making a payment plan.

Remember: not all clients who miss payments are doing it because they simply don’t want to pay.

Residential clients may have encountered a family emergency, a banking issue, or job loss. Commercial clients may have made a simple accounting error, experienced a staffing change, or are waiting on their accounts receivable to pay you.

Sometimes debts are caused by extreme circumstances or human error. Find out what the problem is before you chase after the debt too aggressively.

Make sure you’re right before you start collecting

Double-check that payment has not been made before sending your client any collections messages. You could burn a bridge or make a relationship tense if you don’t.

There are a lot of variables at play that could impact whether or not your client pays you on time. For example:

  • Your employees or contractors told the client they could pay by a different due date
  • Your client sent you a cheque in the mail, but it got lost
  • You have the right phone number and email on file
  • You never specified the correct payment information, the due date, accepted payment methods, etc. before starting the job

Having processes and organization behind your business can move mountains for you in these types of situations:

Be flexible with payment options

Try to work with the client when they have an overdue invoice. Consider allowing them to make biweekly or monthly payments––whatever repayment plan that benefits both of you.

Remember, the goal is to get paid. Being inflexible can put a wrench in this process, which is why it’s important to remain easy to work with (even if you’re frustrated).

Change your perspective and remind yourself that you might be getting paid differently than you had planned.

Top accounts receivable payment techniques and tips

The best way to collect a debt is to avoid having to do it at all. One of the absolute best solutions is to get your clients to switch over to credit card and online payment options.

It saves you time, makes payments as easy as clicking a button, and helps speed up processing time.

Here are some suggestions to help you get your clients to switch over to online payments:

  • Start by offering credit card payments. If you don’t offer it, you’ll be stuck waiting for snail mail (or your payment pick up driving rounds) and then cashing that cheque.
  • Include a clause in your terms of service stating that clients must have a credit card on file to book a service. This is helpful for liability and efficiency.
  • Make sure online payments are clearly advertised or stated as a payment option on your quotes, invoices, and website.
  • Avoid mailing invoices. This can result in lost invoices and late payments. Consider using digital invoices that also offer instant payment options when the client opens and reviews them.
  • Offer an incentive or charge a fee or penalty for specific types of payment methods. For example, offer clients who pay with cheques 10% off on their first transaction when they switch to credit card payment. Or, consider changing a time and inconvenience fee for cash or cheque transactions.
  • Remind your clients that you will not pre-bill them without their authorization if they are hesitant to try credit card payments. You can even write this into your payment policy. For example, “Our policy is to never bill you until the work is complete and you are completely satisfied.”
  • Use software, like Jobber, to send timely invoices and payment reminders before payment deadlines.

Preparing for late payments

How you handle late payments can be different for each client. While you may be more forgiving with residential clients or clients who have paid on time in the past, you may handle commercial clients or new clients completely differently.

The most important thing is that you have a standard process in place. This will help guide your actions and responses when you do have a debt to collect on. 

Start by:

  1. Having a payment policy in your contracts and quote templates. Walk your clients through it before they sign anything.
  2. Have your policy reviewed by a lawyer to make sure it’s good to go.
  3. Run payment reports regularly to make sure you’re up to date on accounts receivable.

This can help to ensure that your collection process is successful and as friendly as possible.

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