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What to do when your customer won’t pay
It’s never fun. But here’s what to do.
Michael Girdley
February 25, 2025
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Hi folks!
85% of business tastes like chicken. And that means pretty much everybody’s solving the same problems.
So: I’m sending out a playbook every Tuesday, for one specific problem small businesses face.
By the way: If this problem resonates with you, you’re probably a good fit for Scalepath — my community exclusively for small business leaders. Apply today!
The Playbook: What to do when someone doesn’t pay you
Why this matters
Small businesses live and die on cash flow. So when a customer doesn’t pay, it’s not just an abstract problem for the accounting department — non-payment can quickly mess with your day-to-day operations.
But at the same time… it happens to everybody. Sooner or later, we all get a bad customer.
So when it happens to you, use this playbook to keep a cool head and make the best of a bad situation.
Disclaimer: I am not a lawyer! Be sure to check with your attorney to make sure you’re complying with debt recovery and contract laws for your area.
WHAT TO DO
1. Assess the situation.
First, determine if the late payment is a one-off or a recurring pattern. This allows you to tailor your response.
For one-off occurrences, a friendly reminder might be good enough.
For recurring issues, a more systematic and assertive approach may be necessary.
2. Confirm invoice details and accuracy.
Good, clear records and documentation become your best friend if you need to escalate the issue. They also avoid potential misunderstandings caused by your error, which can be embarrassing.
So:
Review the invoice(s) thoroughly
Check each line item, quantity, and unit price to ensure accuracy.
Verify all calculations and totals against the agreed-upon terms.
Verify goods or services delivery:
Check all documentation such as delivery receipts or service completion confirmations.
Ensure that the delivery aligns with the timeline specified in the invoice.
3. Once the payment is missed, send a formal notice.
Now the fun part begins. Send the customer a clear, concise letter or email.
In the subject line, clearly state the purpose of the communication — to remind about the outstanding payment.
Then provide a summary of the outstanding amount, due date, and applicable late fees.
Offer flexible solutions, and be open to discussing different payment arrangements or alternative solutions that would work for both parties.
Approach the conversation with empathy, and open the dialogue by asking if there are specific reasons for the payment delay. This can prompt a productive discussion.
Set a firm deadline and explicitly outline the consequences, such as service suspension or legal action.
4. Issue a final demand letter
If your previous communication didn’t work, craft a formal, precise letter stating the legal consequences. Make it look professional, and specify potential legal actions if the outstanding amount is not settled immediately.
Include a timeline for the client to respond before such actions are pursued.
5. Consult your attorney about appropriate legal action
Provide them with all relevant documentation, including the invoice, contracts, and communication records.
At this point, you have 4 potential paths to resolution: mediation, small claims court, debt collection, or writing off the debt. Consider each, and ask your attorney for the strengths and weaknesses of your case.
Mediation
This may be a more cost-effective and time-saving approach than taking legal action. It fosters an environment that encourages compromise and resolution.
Research and identify professional mediators or mediation services. Then propose the idea of mediation to the client, emphasizing its collaborative and non-adversarial nature.
Collections agency
Agencies are pretty effective at getting the funds, and you won’t have to spend any more of your time and energy on the case. However, agencies usually retain a large percentage of what’s owed you (sometimes 50% or more).
Small claims lawsuit
If your attorney recommends taking this route, file a lawsuit in small claims court.
The limit for small claims varies by jurisdiction, but is normally under USD$5000. Research the specific procedures for filing in your jurisdiction.
Ensure you understand the filing fees and any other requirements.
Write it off
Consider whether pursuing the debt is worth your time and effort, weighed against the potential fees and legal costs required.
In the Scalepath community, some members have suggested writing off anything under $8,000. Depending on the business, I’ll consider writing off anything under $25,000.
You might even be able to claim it as an expense on your taxes, if you can prove to the IRS that you’ve taken all reasonable steps. (Consult your accountant on that one.)
Spend your time on your good customers instead.
How to make sure it doesn’t happen again
Running down money is a pain in the butt. And you don’t want it turning into a pattern.
Take a good look at your processes and consider the following:
Are you picky enough about your clients? Could you find ways to screen more or be more selective?
How clear is your onboarding process? Do new customers fully understand your due dates, late fees, and consequences? Are they clearly explained in your onboarding docs?
Can you change your payment methods to be more preventative?
Collecting bank / routing numbers instead of credit cards
Getting paid in full (or a high pct) up front
Use your invoicing software to automatically send reminders / prompts
Lots of accounting software can trigger automatic reminders when a payment is overdue. Use automation where you can to ease your admin burden. So if you can, set up reminders at specific intervals leading up to and following the due date.
The final word
It sucks when a customer doesn’t pay. But if you’re in business long enough, it’s inevitable.
So do your best, but don’t kick yourself if you have to walk away.
It’s on to the next battle.
There’s my playbook for today!
What do you think? Hit reply and let me know!
Michael
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