So someone owes you money and you want to make sure you can get it back. Stay tuned because I’m going to walk you through my five-step battle plan to make sure you can recover your hard-earned cash as a small business owner. I’m attorney for creative entrepreneurs, Brittany Ratelle, and I’m here to help you make sure that you can own your business in every sense of the word. Make sure you like and subscribe to my YouTube channel for more tips on how you can protect your modern, small business.
Someone Owes You Money
If you are running a business, making money, and selling products and services, sometimes you have problems collecting payments. What are you supposed to do if you have an overdue invoice and you need that money? You may want to know what are your options in terms of moving forward.
Step #1: Check Your Contract
Let’s start with step one, check your contract. This is assuming that you have some sort of written agreement between you, your customer, and your client. It’s probably no surprise that this lawyer recommends that everyone have a written agreement that can outline and clearly put boundaries on the expectations of what each party is going to do in a deal. It can protect you to make sure that you have clear expectations on what deliverables or services you are going to be providing for the other person. When someone owes you money, you are going to want to refer back to that written agreement.
A contract can also outline things like payments, confidentiality, intellectual property, licensing, and what happens if the unexpected happens and things go wrong. If you have a contract, pull it up and check for terms that might address things like payment, payment timing, and payment details.
Late Fees, Attorney’s Fees
Check if there is any language about late fees and whether you have the option to collect a late fee. If your contract is silent about this, that doesn’t mean that you can’t collect a late fee. However, it’s going to be harder because you have to look at what the precedent is in your state or jurisdiction that’s going to apply to the contract at hand.
You also want to look for language that allows you to collect attorney’s fees or collection fees if you have to chase after payment on an agreement like this. Be sure to check the contract for clauses that address dispute resolution. And you want to know what are the options if this deal goes sour.
If this payment issue remains outstanding, what are you supposed to do to be able to resolve this business dispute? I don’t really like arbitration and forced arbitration provisions on most small business contracts, especially if the value of that service is under $10,000. Arbitration can actually be pretty expensive even with a single arbitrator, let alone if your provisions want you to do the full three-panel as some commercial provisions do. This is a good reason why you don’t want to copy someone else’s contract. It might have language in there that doesn’t apply to your business, and is overkill for your situation. It may not apportion risk between the parties.
I like to use small claims courts or be able to go directly to collections when someone owes money. You want to make sure there is language in your contract that protects you. What you don’t want to do is freak out and tell someone, “Show me the money!” Jerry Maguire style, as helpful as that can be from you. #sarcasm
Don’t Take it Personally
I understand that people not paying their bills can be a really emotional thing. It can feel like a sucker punch. You could feel like someone is literally reaching out and stealing money and food out of your children’s mouths. Sometimes, invoices get lost or you haven’t invoiced a company properly. They may have net-90 payment terms, especially if you’re dealing with a larger company.
It’s good to understand that accounts payable departments are large accounting departments and it takes them a while to pay their bills, even though they’re good for them. They just have their own internal bureaucracy that you have to deal with. You will want to go back and look at the language of the contract to determine the payment terms and your options. I recommend reading over that and making yourself familiar with that agreement.
Step #2: If You Don’t Have a Contract
If you don’t have a contract, what are your options now? If you don’t have a written contract, look to see if there’s any other kind of mini contract, binding agreement, or meeting of the minds (as we like to call it). That’s lawyer-speak: a meeting of the mind indicates that there was an understanding between you and the other party. Certain things were supposed to be paid and services were supposed to be delivered, and this did happen.
You can check purchase terms or purchase orders and see if there’s any fine print on there. You can look to see if anyone checked the box during their checkout process. There might be privacy policies or terms and conditions of that sale that you can fall back on. Look to see if there are any other generic website policies that could apply if they purchased directly from your website.
If someone purchased from a marketplace like Etsy, Amazon, or TPT, you can go to that marketplace and see what the terms are. With most of the marketplaces, you usually get your money upfront. So it’s not normally an issue. But if you’re selling on another marketplace, or there’s a payment plan involved, we want to see if there is any other language. Just because it’s not written in a fancy-looking contract doesn’t mean that there is not a contract (meaning there was an agreement in a meeting of the minds between the parties).
We want to go far and wide to see if there is any other documentation, even email, DMs, a phone call, or a video call if you have it, especially if they’re recorded. It could help you substantiate and show your position. You could say, “Hey, this is what we agreed to. Remember?” At the very least it could jog someone’s memory that they owe you money. Make sure you see if you can find one of those resources.
Step #3: Reach Out
Now it’s time to reach out to your delinquent payer. Reach out and reach out again. Make sure you’ve given them multiple opportunities to pay. We’ve all been there and we have busy inboxes. Things accidentally go into spam folders. Assistants don’t direct things in the right manner. People sometimes accidentally dispute a payment because they don’t recognize the charge on their invoice on their credit card statement, especially if it’s under the name of a different LLC or something that’s not directly connected to what the payment was.
I see this happen all the time to my clients who are online educators. They set up their LLC long ago and it doesn’t match their current business. It’s not the name of the actual course, program, or membership of the subscription that you got someone to sign up for in a funnel. When it shows up on their bank statement, they start to freak out and decide to dispute it.
This is another reason why you want to have some language about chargebacks. If someone does a chargeback, whether it was in good faith or not, you have some wiggle room to try to get those costs covered. That way you’re not on the hook for it.
Make sure you reach out and give people an opportunity. I like to actually quote the contract if I can. It could be a more informal voice, but make sure you’re very clear in your expectation of what the outstanding charges are. How are they supposed to pay you? Is it by check, wire transfer, PayPal, credit card, or ACH? Make all that really clear.
If you can, make sure you cite the original contract with those terms. Remind them again, let them know if there are penalties, and what’s going to happen. What incentives do they have to move quickly so that they can pay on time? You want to be in a cash flow-positive situation. Make sure you give a firm deadline. “If I don’t see this by this date,” or “If I don’t hear back from you by this date, this is what’s going to happen next.”
Step #4: Demand Letter
Step four is a demand letter. These are also known as angry lawyer letters. They are more formal letters that talk about what’s going to happen. This is the last stop on the train before we actually take some legal action. In your demand letter, you’re going to be more formal and serious. Quote the contract if you can.
You also might quote applicable state law if it applies here if there was a breach of contract of payment. If you can, cite some UCC code that pulls in there. We want to pull in any of those other details that we found through our other steps
Get an Attorney Involved
Whether it’s fair or not, attorney-drafted demand letters are taken more seriously. Maybe you’ve tried some of these other steps and the person has stonewalled you, blown you off, or hasn’t given you any feedback. If it’s enough of an amount that it means something to you, it may be worth reaching out to an attorney and having them draft a letter for you. They can send it on their letterhead.
When I’ve sent these to clients, it’s magical. Sometimes we get payment the next day. They find the check or the invoice and the money comes in like it was supposed to in the beginning.
Step #5: Follow Through
The last step is the follow-through. In that demand letter, we want to have those same details that we did in step four. What’s going to happen if this doesn’t happen by this date? Make sure you give a clear call to action and list your expectations.
Let them know what will happen if you don’t get a certain amount of payment or even communication to set up a payment plan. Sometimes people have gotten into a rough spot financially. While that’s not your problem as a business owner, you can set up a path for them to make good on the agreement, which will allow you to get some sort of payment and move forward.
Some people try to avoid conflict and will just bury their heads in the sand, be embarrassed about it, and not contact you at all. If you can, make space for people and say, “Hey, if you’re in a different financial situation, if something has changed, please let me know if we need to set up a payment plan.”
You could have them pay a little bit every month to get things moving forward. That’s your prerogative as a business owner to decide how you want to run your billing. From a practical standpoint, being flexible can help smooth things over and actually get people to answer your emails. It could even start a dialogue on what’s really going on here and help you figure out how to fix it.
With step five, you’re going to need to follow through. This may mean that you actually file a claim in small claims court, or you begin mediation, arbitration, or full-scale litigation. No matter how many times you’ve watched Law & Order SVU, you are probably not emotionally or financially prepared for how expensive and time-consuming real litigation can be.
Small claims can be a really great option. A lot of states don’t even allow attorneys in small claims and it’s set up for the people. Normal business owners can represent themselves. It takes half a day and has a small filing fee. You lay out your case, the judge listens to you and the other party, and they make a snap decision right there. Then you’re on your merry way. It can be a fairly easy way for you to get recovery up to a certain amount. Some small claim courts have a limit of $10,000 and others go all the way up to $35,000 in recovery. It depends on what the issues are.
Another option that you have is to work with a collections agency or a debt recovery. They’re going to be the ones who will actually take over the debt and then go after it. They will use a combination of tools to try to get recovery for you. Then they get a contingency fee or a commission, based on the recovery that they get for you.
Someone Owes You Money
I hope that this has been helpful as we’ve walked through some of the options that you have. If someone owes you money, we want to get some of that money back into your pocket. For more information on how you can get a good solid contract, head over to Creative Contracts. I can help you outline all of these steps and set you up so that you are protected from that 1 – 5 % of crazy clients that are just not going to pay their bills. We can prevent this from turning into a legal headache for you. My curated legal template shop gives you solid attorney-drafted color-coded documents. I have step-by-step videos to make it super easy for you to get you and your small business legally legit.
Make sure you like and subscribe to get more legal tips from me, an attorney for online entrepreneurs, just like you. As a reminder, while I’m a licensed attorney, I’m not your attorney. Anything I say here or any of my other resources is for informational purposes only. However, I hope they’re helpful for you to start getting some better language and better tools in your business toolkit so that you can move forward as a confident entrepreneur. Thanks for being here.
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