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I responded to a post on the Econsultancy forums the other day which dealt with an issue most of us have had the misfortune of dealing with at some time or another: deadbeat clients who haven't paid their bills.

In tough economic times, businesses and contractors providing services to others need to be extra vigilant about deadbeat clients because there are simply more of them out there.

Sometimes these clients aren't deadbeats because they want to be. Take for instance the theoretical long-term client who suddenly can't pay what he owes you because he himself is owed money that he was relying on to pay the bills.

Unfortunately, once you find yourself dealing with a deadbeat client, the outcome usually isn't good. In many cases, recovering anything at all is impossible and for most of us, the amounts owed don't justify costly and time-consuming legal action and collections.

So what's the best way to deal with deadbeat clients? Avoid them.

Here's how:

Always sign an agreement. Not having an agreement makes your life 1,000 times more difficult when it comes to dealing with a deadbeat. The mere lack of an agreement often gives the worst deadbeats the feeling that they're safe because even if they're in the wrong, most know that the time and money required to establish the facts surrounding what was agreed upon make legal action an unattractive proposition.

Get milestone payments. Never put yourself in a position where you've done all the work and are due one big payment from the client. You assume too much risk when you do this. Instead, agree upon key projects milestones and base the milestone payments on how close each of those milestones brings you and your client to completion.

Don't forget the most important milestone: the deposit. A deposit of 10-25%, due upon execution of the agreement, is usually reasonable depending on the type of project and total project value. A deposit is valuable for two reasons. First, if a client can't make a deposit payment in a timely manner, chances are he won't make future payments in a timely manner. And second, as an added bonus, once a client has given you some money up-front, he's more likely to be eager to keep the project moving at an appropriate speed.

Don't deliver or deploy until you're paid. Once a client has the opportunity to sign off on the final work product, you should require that the remaining balance due be paid in full before the work product is delivered or deployed. This prevents you from finding yourself in a situation where the client has everything and you have nothing.

Don't assign intellectual property rights until you're paid in full. This is perhaps the most important weapon against deadbeats that you can include in your agreements. Assuming that you're producing a work product under a 'work-for-hire' arrangement, your agreement should clearly state that all right and title to the intellectual property you produce is only assigned to the client after the client has paid you the full amount specified in your agreement.

When this is contained in your agreement, if you find yourself dealing with a deadbeat who uses any of the work product he hasn't fully paid for, he will be violating your intellectual property rights. This provides significant legal leverage. Not only does it offer additional legal recourse, it makes it possible to pursue takedowns of your work product where appropriate. For instance, if you design a website for a deadbeat client, it may be possible to pursue the takedown of that website with the website's host since the deadbeat client's use of the website will be in violation of your copyright.

As they say, "an ounce of prevention is worth a pound of cure" and that's especially true when it comes to dealing with deadbeat clients. Avoiding them is 90% of the battle and by following these simple tips, you will probably be able to eliminate the deadbeat client hassles that so many have pulled their hair out over.

Patricio Robles

Published 17 February, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2378 more posts from this author

Comments (6)

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Jamie Riddell

An excellent post. To add to this, if you are a media agency buying media on behalf of your client, make sure you have credit insurance. If a deadbeat client owes you money you will have to find it to pay the media owers. In the UK the agency is principle at law so watch your risk and exposure when buying on behalf of clients. Credit insurance won't cover all the spend but enough to make the pain a little easier.

over 7 years ago

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Chris Averill

Good point well made and pointed out to me bu one of my clients!

From our persepective, as a small agency working with large clients I would add:

  • Upfront payment is something we never see for consultancy servics.
  • We require PO numbers from every client prior to work happening.
  • If the client does not have a PO system, then an email agreement from the BUDGET HOLDER, no one else will do.
  • Foreign clients can be much harder to deal with, be very wary.
  • If it's too good to be true....it's too good to be true!

over 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Years of working as a commercials producer has made me quite careful, but I had forgotten about assignment of copyright magic trick.

I'll have to put that back in all our agreements.

Getting at least 25% of the budget up front is the best suggestion here. Deadbeats don't ever like to lay down more than 10%. You'll get rid of 90% of the deadbeats right there.

over 7 years ago

Tony Barker

Tony Barker, Director & Founder at eEnablement - Online Interim Management & ConsultancySmall Business

Echo point re IP assignment - having worked client side in large PLCs and SMEs, and now working for myself, some of the worse offences I have seen have been due to simple ineffeciencies bordering on incompetencies in larger organisations to do even the basics around procesing and paying an invoice.

over 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Hello Tony,

The inefficiency/incompetency is just an excuse to hang on to the suppliers' money. If you have twenty suppliers waiting on 100K for six months, we're talking real cashflow.

Moreover if one or two of them go bankrupt or the principal dies in that six months, we are talking equity. At least the odd invoice never gets paid, thanks to the inefficiency.

It's a wicked system. But in the end it bites the bad payer. When I paid the bills regularly for my own suppliers, we could get estimate in at about two-thirds the price of long payment estimates.

over 7 years ago

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Iris Salmins

Hey,

Great blog!

Protect your most valuable asset...your cash!

Don't let your clients grow their business and pay their expenses with your money.

If they aren't paying you, they aren't your client, they are your dependent.

How can you be helping them by giving them additional goods and services and putting them further in debt?

We will collect money from non-paying clients for you. No amount is too small. No up front fees. If we don't collect you pay nothing. Our charge is 20% for amounts under $7500. 

Iris Salmins

Collection Agency for the Media Industry

EJL and Associates

866-953-1777 ext 102

over 7 years ago

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