Late or non-payment is one of the trickiest issues that entrepreneurs are commonly forced to learn to deal with. How good business owners are at dealing with clients who don’t pay, or who pay late, is strongly indicative of how successful their business will be both in the short and long run.


There is no simple set of rules that can guide how to best proceed when a client doesn’t pay. Acting too aggressively can result in the loss of potentially valuable clients, while not being assertive enough can result in a company being exploited and driven into serious financial difficulties. To manage this type of situation well, businesses need to work hard to understand their particular clients, their own business, and the financial and legal options available to them.

When to stop work

For many businesses, halting work immediately isn’t the best policy, because of the opportunity costs associated with such a move. This is particularly true when the client represents a major portion of the company’s business. However, a business that overextends itself in serving a non-paying client could find itself dragged into serious financial difficulties of its own.

Suspending work, or firing a client entirely, is something that businesses need to do when they seriously suspect that they won’t be paid for that work. This might be because the client is insolvent, or simply planning to avoid paying until forced to do so legally. For many small businesses, the legal costs of suing for payment in such a situation could exceed the value of the outstanding invoice. At this point, continuing work for any length of time is generally unprofitable.

If, on the other hand, a client just pays habitually late, other measures could be taken to remedy the issue. The introduction of late fees or the threat of involvement of a legal professional, for example, can often deal with more minor chronic problems.

Address cash flow issues immediately

Entrepreneurs without a great deal of experience may only respond to late payments by attempting to chase the delinquent client. After all, they need those revenues in time to make their own outgoing payments. Relying on those late or non-paying clients to come through, however, is extremely risky. If the money doesn’t come through, the business could become unable to pay its own suppliers or to make payroll, resulting in interruptions to its own operations. This, in turn, would likely cause even more issues going forward.

Instead, business owners need alternative financing solutions that will help them keep their business running regardless of what kind of cash flow issue might arise. The two most versatile tools for this are invoice financing, and supply chain finance, which can be used separately, or in conjunction, in order to consolidate funds as needed.

Invoice financing is a tool that allows businesses to bring in additional revenue by trading in an unpaid invoice for most of its value to their financial institution. That institution then collects the payment from the client, before issuing the remaining funds, less their fee. Supply chain finance, on the other hand, works by freeing up existing working capital. Instead of paying suppliers out of their own pocket, they can do so using a credit fund that’s furnished by the financial institution’s investors. Payments on the balance of that fund can then be deferred, giving the business the time it needs to deal with the original issue.

Prevention is about communication

The best way to deal with payment issues is, of course, to avoid them in the first place. While some businesses fail to pay due to their own financial difficulties, many simply hope that they’ll get away with it, or even just forget. To nip these latter two issues in the bud, it’s essential to base client relationships on strong professional respect and communication.

This is ideally done more specifically by communicating with clients effectively about payment expectations, and what they can expect in the event of non-payment. Most importantly, it means working with a lawyer to create a clear and enforceable contract, and taking pains to ensure that the client is explicitly familiar with it. This doesn’t so much remind the client of their obligations, so much as indicating that the business won’t simply tolerate ill treatment, and would likely be both bothersome and expensive to attempt to swindle.

Dealing with non-payment is both a soft and a hard skill. Business owners need to be able to calculate costs, manage their finances, and consider risk, while also making largely intuitive judgment calls about their clients and communicating effectively to establish the respect they are due. By mastering this diverse array of skills, business owners can ensure that their operations run smoothly and grow, while also avoiding potentially predatory situations, and retaining profitable clients.