Finance

How do you deal with a client that doesn't make paying you a priority?

Jens Zalzala Founder, Head of Mobile Apps Development at Shaking Earth Digital

October 1st, 2015

I run a software development service company and have a client who every now and then decides to stop paying me for months at a time. We bill them hourly for work performed and invoice about every 3 weeks. 

The client is a startup we've been working with for over 2.5 years now. I mainly deal with the CTO, who keeps assuring me that they are on it, but ultimately he's powerless on that front. They don't seem to have a CFO, or accounting of any kind, so their CEO handles payments.  

I *think* what happens is that the CEO is too busy to deal with it, will let things slip, will then try to do everything at once and will freak out about seeing months of bills stacked up and in turn complains to the CTO about how much everything is costing, which then trickles down to me. 

The thing is, I do believe they'll pay eventually (they have in the past), but they're seriously screwing up our cash flow, and the added stress is just not something I need. 

So how do you deal with clients that just aren't organized on the payment front? Do you add penalties? Do you add incentives for paying on time? Do you just move on and find another client? 
Too many founders wing it when it comes to financials; they have no idea how to explain them to investors. In this course, we’ll teach you how to build a basic financial model; read financial statements; and understand cash flow, balance sheets, and income statements.

Michael Barnathan

October 1st, 2015

If it's that critical to them, they can afford to pay the people who are making it happen in a timely fashion. If you're uncomfortable stopping work immediately, give them an ultimatum.

Also keep the code in a private repository and don't release it to them until payment is granted. I do this on every development project, and it's written into my contracts. They get to see the shiny thing, but they don't get to adopt it as their own until they pay for it.

Peter Weiss President at American Outlook, Inc.

October 1st, 2015

The Russians used to say "they pretend to pay me so I pretend to work".

Funny thing how some start-up managers think everyone should underwrite their dream, most especially their service providers.  The phone company will cut them off after a couple of month and is righteous about imposing and collecting late payment penalties; so is the credit card company.  Landlords will toss them out of their space.  If you don't pay your hosting service things get sticky after a while.  See what happens when you try not pay the guy at the food truck or the pizza place.

When one of my clients is tight on cash we talk to our vendors, make partial payments and always return their phone calls.  If we've committed to paying on a certain schedule and realize we're going to be behind by more than a few days we let them know and ask for their cooperation.  It's amazing how much help and consideration you can get if you demonstrate good intention.  

The flipside is that if someone goes dark, we reach out to find out what's going on.  If we don't hear back we slow down and eventually stop delivering.  As long as they're behind they are a low priority client.  I will be polite (until they've made it clear they don't care about paying) but we can always decide whose call gets answered first and how long we talk to them.  

A friend of mine told me years ago "I don't take risk to break even.  If I take risk I expect to be paid well for it."  A client who pays slow or sporadically should not only be paying penalties for not keeping their word but should be charged a higher base for the annoyance, distraction and disruption they will cause to your business.

Put bluntly, your client hopes the work you are doing is going to make them very rich.  If they don't keep their promises to you and can't find the time or energy to at least keep in touch, you have no obligation to help make them rich.  Your first obligation is take care of your family, your team and yourself.

Michael Barnathan

October 1st, 2015

Stop work until they pay you, obviously, and make sure you set frequent milestones so your loss is limited. If they do this often, you may want to consider whether keeping the client is worth it.

Brent Laminack Principal at OpenFace Systems, Inc.

October 1st, 2015

Jens, you need to add the percentage. Here's why. If you demonstrate to them that you don't take your contract seriously, then they have no reason to take it seriously either.

Michael Barnathan

October 1st, 2015

If they don't plan to pay you anyway, tacking on a penalty won't work.

Sure they're not taking you for a ride? I try to assume the best of my clients and give them the benefit of the doubt, but sometimes there are signals they're not acting in good faith...

Brent Laminack Principal at OpenFace Systems, Inc.

October 1st, 2015

What does your contract with them say? Mine says if they don't pay in 30 days they get sent to collections. If they don't want to pay, they get a letter from my lawyer. My contract says that all billing disputes will be settled by mediation. My lawyer's letter says he'll be setting up mediation (in MY county) within 10 days and asking the mediator to grant us all legal fees on top of what they already owe us. Amazing how fast we get paid in most cases after the letter goes out.

Tim Scott

October 1st, 2015

I do believe they'll pay eventually

Until one day they won't. Operating this way not only takes an emotional toll, it poses a real financial risk, especially when it's a startup.

Unless they otherwise suck as a client, don't quit them. Implement some kind of work stoppage or financial carrot/stick policy. Make it a policy and tell them. Ad hoc will needlessly raise everyone's emotions. If this policy causes them to quit you, wish them luck.

Michael Barnathan

October 1st, 2015

It's a developer's market. If they're inconsistent about paying, it's easy to find another client who isn't.

There was a website where you could report non-paying clients as well, as a warning to others. I forget where (I've been out of freelancing for some years), but it may have been Freelancer's Union.

Michael Barnathan

October 1st, 2015

Bottom line is that you have to defend your right to get paid for your work, more aggressively than your personality may make you comfortable with. There are many ways how, but you need to show them they can't walk all over you with impunity.

The more slack you cut them, the more they'll see that this behavior is OK.

Jake Carlson Software Development Manager at Oracle

October 1st, 2015

I feel your pain. It really depends on the relationship you have with the company and what terms are in your contract. My invoices are net 15 but I usually don't take on a late charge until net 30. However, if this client represents a large percentage of your income and non-payment is affecting your cash flow substantially as you mentioned, you need to take a harder line. A diplomatic way of saying it to them is this: 'Unfortunately, we will need to prioritize work for other clients that pay promptly in order to protect our bottom line.'

If this is a critical juncture in their project, they have more to lose than you do. If they consistently don't pay on time and you've given them reminders in writing, stop working for them and just say you have to prioritize the projects of paying customers. Seriously, they won't stop stiffing you until you let them feel some amount of pain over it. You're just shifting the burden / risk onto your own shoulders by codling them in this way. You can be diplomatic and nice about it, but don't let them put you in this position.

The advice about milestones is also good. Finish a milestone and let them know that no further work is going to happen until that milestone is paid up. That will force them to pay in a hurry, trust me. In fact, for larger projects, I usually charge 50% of each milestone up front. So 50% of the first milestone is due when the contract is signed, then the remaining 50% of the first milestone plus 50% of the second milestone is due after completion of the first milestone, etc. You mentioned you're working on an hourly basis, but you can still give ballpark estimates in terms of hours for each piece and invoice 50% of the estimate up front and the remaining balance upon completion of each milestone.