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Unfortunately, most businesses must deal with non-paying customers.  You can protect your business from non-paying customers by being proactive.  Attempting to collect a bad debt after the fact is expensive and can lead to critical cash flow problems for a business.


Here are some suggestions on being proactive:


(1) Screen potential customers in advance to protect your business from non-paying customers. Particularly if a transaction will require the customer to make a large payment, it is worthwhile to do a little checking before entering into a contract with them. A simple internet search may reveal court records, complaints with the Better Business Bureau, or other warning signs.


(2) Always use a written contract.  A contract can help protect your business from non-paying customers because a written contract provides certainty about each party’s rights and obligations. The payment terms should be clearly spelled out. The inclusion of a late payment fee and attorneys fees for collection may deter customers from making late payments or failing to make payments at all. Mediation and arbitration clauses help the parties to resolve disputes without expensive lawsuits.  Clearly specifying terms in the contract helps to avoid misunderstandings.  Having a clearly written contract is a key to protect your small business from non-paying customers.


(3) Requiring a deposit is another way to protect your business from non-paying customers. This is particularly important if your business must incur substantial expenses (for example, purchases of materials or equipment) in order to provide the services or goods to the customer. Not only will this help defray losses but it will protect your small business from cash flow problems.


(4) Promptly send non-payment notices. Continue to reissue invoices marked “past due” until the customer pays the amount owed.  If your business is in certain industries, like construction or repair, you have a right to security against the property on which you performed work.


(5) For a customer who has been problematic in the past, consider requiring full payment prior to delivery of the goods or services.


(6) Stop doing business with customers who are repeat offenders.  The best way to protect your business from non-paying customers is not to do business with them at all!

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