Business Law: Recalibrating Your Deadbeat Meter

By Nina L. Kaufman, Esq

Trying to collect on a delinquent debt is rarely a profitable experience - in any sense of the word. You can prevent time-consuming lawsuits by becoming savvier about choosing the right clients. If you're already "in the soup," FEM has provided tips on dealing with deadbeat clients (see "When Clients Don't Pay," Sept/Oct 2003). But your productivity and success will depend on your ability to pre-screen for these problem people so that you don't take them on in the first place.

KNOW THYSELF

Ideal clients don't just drop out of the sky. You need to develop a plan for attracting them effectively.

1. Revisit your business plan - Part 1. What do you do? Whether or not you actually put a formal plan to paper, you should have a good idea of the business you are in. If you're a website designer, for example, where does your expertise lie? Designing the graphics? Writing the copy? Programming the code? Hosting the site? A combination of the above? Problems arise when you try to be all things to all people . . . but don't have the experience, staffing, or real desire to do it all. Invariably, when you get into an area where you lack the expertise or don't enjoy the project, the quality of your work suffers - plus, the amount of time it takes you to complete it increases. This hurts your reputation and your profit margin.

2. Revisit your business plan - Part 2. Who is your ideal target market? Yes, this sounds like "Business Plan 101," but it is uncanny how many entrepreneurs have not taken the time to hone their vision of their ideal client. "Ideal" can include factors such as geographic location, size and age of business, sophistication or background of the business owners, industry area, payment history, and average monthly use of your service or product. It can also include intangible "gut" factors such as "do we have chemistry" or "do they seem willing to take my suggestions." Whom do you really want to attract? If you are a 2-person PR firm based in Ohio with a background in the women's health field, is it really in your best interest to take on work from a Fortune 500 company that specializes in automobile parts? Depending on the nature and length of the client relationships you seek, this may or may not be the right fit for you.

3. Be clear about your rates. To do this, you should have analyzed the financial needs of your business. Take the time to determine how much you need to charge, the method by which you will do so (by project? milestones? hourly?), and when you expect payments. Communicate this clearly and assertively. Prepare a rate sheet to hand out to prospective clients, if you feel that would be appropriate. Nothing smells more like easy prey to a deft deadbeat than an entrepreneur who waffles about what she charges. It's a clear sign that she lacks the confidence in her worth - and therefore, may be a pushover when it comes to handling collections if the client chooses not to pay.

4. Know how much credit leeway you will give to clients. All relationships require a bit of give-and-take. So how much are you willing to let others take without their giving back to you? In other words, how long will you let bills go unpaid without taking action? Determine in advance how you will handle bad situations and what you will do at each stage. Will you stop work at some point? Charge interest on outstanding invoices? Definitely put your collection policies in writing so that they are clear, communicated up front, and easier to enforce.

5. Ask for appropriate referrals from trustworthy sources. Emphasis is on the word "appropriate." All too often - and this can be a particular scourge of leads referral groups - members may send any "warm body" to you, in order to get the credit for the referral. When talking to referral sources, be specific about your vision of your ideal client. If a referral source continues to send you "duds," it's time to either have a networking meeting to clarify your criteria . . . or drop the source. Repeatedly taking on lousy work at reduced rates for people's crazy cousins just because they're in your networking group is not a productive way to build a business.

READING THE SIGNALS

Once you have determined what kind of client is right for you, it becomes a lot easier to see straight off who is a bad fit. Nonetheless, we can sometimes get caught up in the psychological ploys and tactics of others, and emerge at the end of a meeting, surprisingly, having taken on that dog of a client. Here are some of the "types" that you can sniff out in advance by seeing the ruses that potential deadbeats often use (especially in tough times):

1. Tina Tyrant: She will demean your abilities and push you around to get a price reduction. You'll hear phrases like, "You charge s-o-o-o much just to do that?" Her twin sister is Sally Sycophant, who will use flattery instead of bullying to get the same discount. For example, "There's no one else in the world I want to work with more. Isn't there anything you can do for me?"

2. Janey One-Note: Jane's questions about your service or product center almost exclusively on how much you charge and how soon you will expect payment. She may have the audacity to get defensive if you explain that, yes, you do have a collection policy concerning outstanding invoices.

3. Diane Dissatisfied: No one can meet Diane's exacting standards. She will regale you with tales of the incompetence of others in your field, all of whom she hired, and all of whom she trusted to provide, but all of whom disappointed her. She usually won't mention that she refused to pay all of them. You'll spend a lot of extra time trying to meet her needs, to the detriment of your other clients. Run the other way.

4. Ursula Urgency: Ursula has gotten herself into a real mess, or needs something at the absolute last minute because a business-destroying deadline is about to pass. "Yes, yes, yes - of course I'll get you the advance partial payment you requested...but couldn't you start work in the meantime?" Don't.

5. Halle Handshake: Halle bristles when you mentioned that you'll put your agreed-upon terms in writing. She may even "conveniently forget" to sign the confirming letter, invoice, purchase order, or contract that you provide to her. You should "conveniently forget" to provide any products or services until she does so.

Stick to your guns. Particularly when economic times are erratic, the temptation is enormous to take on work for clients who are less than ideal. But you can probably bet easy money in Vegas that these are the deadbeats you'll have to chase after. Should you end up in court, they'll very likely counter that your performance was substandard. Avoid the headaches by avoiding them. By recalibrating your "deadbeat meter," you will spend far more of your time in profitable - and pleasant -- collaboration.

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker