America has alot of deadbeats. If you don't believe me, believe this: In 2005, businesses lost $180 billion due to deadbeats. To be successful, you have to deal with deadbeats, because very few businesses are lucky enough to have a complete roster of perfect customers who always pay on time. These are the customers who tell you that "the check is in the mail" and one month later, you call and "the check is still in the mail." You wonder if they must live in Antarctica or Timbuktu because your check is always late - or gulp! - lost in the mail. Dealing with deadbeats is essential for startups because oftentimes your customers are small businesses too. After all, a startups first customers are often early adopters who work with you because there are no alternative solutions. How do you deal with deadbeats and how do you wean yourself off of them?
I have studied this issue and am a student and former victim of Deadbeats Anonymous. I say that half jokingly but it is a lesson from the school of hardknocks. Only after having gotten burned have I realized how important it is to have rules on choosing and dealing with your customers. After much pain and loss, I believe these are some essentials on how to deal with them.
Tips on Dealing with Deadbeats.
1) If you are a startup, choose large established customers. Let me put it another way: If you are a startup, avoid having startups as customers. I will draw upon a personal lesson as an example. A few months ago, a friend of mine decided to work with a startup to serve ads on his blog. The startup, backed by lots of venture capital (close to $20 million), had a sterling team of entrepreneurs running the company. They had built a successful dot-com during the late 90s. As a result, he trusted them to bring ads to his site. The relationship started off great in the beginning and they promised big results. Great - he thought. You can't beat that. Unfortunately for him, things didn't turn out so great.
The first warning sign was that they chose to pay him on a net-60 day basis. Normally, the online advertising companies pay net 30. For those who are just starting a business, remember this: business is about making money and you can't make money if you don't get paid. Net 60 means that you get paid almost 90 days after you serve their ads. This was not a problem because he received the first check - they were slightly late on the check. They paid after 100 days. But then the problem happened again because they "forgot" to send the next 3 checks. The "deadbeat" alarm went off and he researched more about the founders of this startup and realized that they had looted their previous dot-com and it went bankrupt. It had even been investigated by the SEC. It's amazing how a few years can wash their slates clean and enable them to start a fresh and con investors out of another $20 million.
Startups tend to be scrappy and while that may be great if you are an entpreneur, it sucks if you are their partner and need to get paid. Large companies have far fewer reasons to stiff you. My lesson learned: Choose large established customers.
2) Insist on Net 30 day payment terms or better. If you are a startup, you are probably short on capital and financing your business out of your own pocket. You eat what you kill - oftentimes ramen noodles for dinner and program in your underwear. If your customers don't pay you, you don't eat.
Starvation is bad. That is why you need to ensure that you collect early. My friend could have reduced the amount of grief working with this particular deadbeat if he had insisted on Net 30 day payments. The simplest way to deal with deadbeats is to insist to your customers that your payment terms are 30 days and that is simply your policy with all customers. If you do not receive the payments every 30 days, you stop work immediately.
Why is this important? It's important because your business is about building the product or service that you want to create. It is not about managing deadbeats. Insist on these rules - because this is in your control - and the rest will take care of itself. The deadbeat customers will avoid you because you will find that the deadbeats realize you're not easy prey. Yes, for every hardworking entrepreneur in America, there is a lazy-ass deadbeat.
3) Insist on cash on delivery if the customer pays late - even once. According to the Wall Street Journal
, That's what Dave Hirschkop did after his customer failed to pay him for a $16,000 salsa bill. That's alot of salsa and Dave learned that the hard way after a customer dragged their feet for 6 months. For Dave, it's especially important because he sells salsa and week old salsa is nasty and irrecoverable!
4) Offer incentives for early payment. If you have repeat customers, offer them a free month of service if they pay for a year's worth of service in advance. That's what many companies do. Think of all the online companies that charge you for content. If you sign up for content online, whether it's online newspaper or subscription content, they all ask you to pay ahead of time - before you use their service. Do that!
5) Get your customers to pre-pay. This is not hard and in fact is becoming the gold standard on the internet. Instead of waiting for customers to pay you after you have delivered the service, charge them before you deliver. That's what Google does with Adwords and Yahoo does with Overture. Here's how it works: If you want to advertise your business on either of those sites, Google and Yahoo ask you to give them your credit card and pre-pay a mininum of $25 to $50. They do that to millions of customers and they're running multi-billion businesses. It's a no brainer and as an entrepreneur you should do that too.
In Summary ...
Dealing with deadbeats is as much about collecting on them as it is about choosing your customers and incentivizing them in the right way with the proper rules in place. If you have the proper systems in place and insist that your customers prepay, you might not have deadbeats at all. I hope these 5 tips are useful to entrepreneurs starting their own businesses.
The solutions I have offered are from my experience and so it is limited to what I know working with startups. I am curious to hear from entrepreneurs and people who have dealt with deadbeats. Do you have a deadbeat story or need help? Feel free to share.