In today’s episode of The Startup Chat, Steli and Hiten talk about what to do if your clients and customers are not paying you or paying too late.
When you provide your services to a client, you expect to be paid for it. But sometimes, clients pay very late or worse, don’t pay at all, and it’s important to know how to handle a situation like this if it arises at your startup.
In this episode, Steli and Hiten talk about why you shouldn’t rely on one big customer, the first thing to do when a customer doesn’t pay, how to prevent this from happening and much more.
Time Stamped Show Notes:
00:00 About today’s topic.
00:33 Why this topic was chosen.
01:44 Why you shouldn’t rely on one big customer.
02:25 The first thing to do when a customer doesn’t pay.
03:40 What it’s like working with big companies.
05:37 Things you could do when this happens.
06:10 How to prevent this from happening.
07:14 Why you should ask for payment upfront.
08:47 How cash is king and key to a successful business.
10:10 Why having a great contract really matters.
3 Key Points:
- Make sure you don’t rely on one big customer.
- You don’t control other people.
- The best thing to do sometimes might be to take it as a loss and move on.
Steli Efti: Hello everybody, this is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: Today on the Startup Chat we’re going to talk about what should you do if your clients or customers aren’t paying you or are paying way too late. Here’s the reason why I wanted to talk about this, Hiten. I had a founder email me a few days ago, basically asking for advice. He has one very large customer, the problem might already start there, and that customer just decided not to pay and isn’t paying, is basically saying that they are going to pay but he has to wait to get that money. He was describing how helpless he feels in he’s like, “This is a really big company. I don’t really know what to do. Should I get a lawyer? I don’t have that much money. Should I just wait, but I need the money right now. Can’t wait for a couple of months to get it. What do I do?”. That triggered the thought like this has happened so many times in so many different situations when a customer’s not paying or paying way too late that I thought, “Hey, this would be a good, cool, fun episode.”. To jump to this one specific example, we might go more broad broadly, but to start there, what would you advise this founder to do? Single founder, you have a big customer, the customer decides money is going to come a little later, what can you do? What should you do?
Hiten Shah: Make sure you don’t rely on one single customer. That’s that large [inaudible 00:01:36]. That’s what you do before you get in a situation. But even if you’re in this situation, go find more customers. You don’t have much of a choice. This is the reason this is going to be a fun one, you don’t control other people. There are actually things to do and I know we’ll talk about them, but someone doesn’t want to pay you or is lagging, then the first thing I do is I go look in my contract. What does my contract say? Hopefully they signed a contract and they’re contractually obligated to certain things. Usually some of them involve paying on time and on time is determined by the contract. I start there, I send them an email or a message, or a phone call, or whatever and I let them know basically work’s going to stop until they pay. You don’t need to work until they pay.
Steli Efti: The service will be interrupted, whatever the service is.
Hiten Shah: Just like your cable, just like your water bill, whatever. You don’t pay, you don’t get service. I would look at my contract because you probably forgot what you put in there, and make sure that you know what the terms are. Based on that, I would email them and then tell them the service, like you said, the service will be paused until they pay.
Steli Efti: Yeah, it’s as simple as that. All right, there’s a lot to unpack there. Number one, I want to give a tip for people that are interested in going after large customers, check out episode number 236, 2-3-6, how startups should go after the enterprise. You can just Google the The Startup Chat [inaudible] 236 and you’ll find the episode. You should listen to that one. But number one, don’t have one large customer like Hiten said. This relates to the episode, to have large customers, you need to have the infrastructure to be able to support that. Part of the infrastructure actually needs the financing. The money it requires to service a customer like that, and at times, to wait as long as it might take to actually get the money from them. A lot of big companies, they like to pay 60, 90, 120 days after they received the service. They like really push this as far as possible. They manage their cash flow, they have a whole department to do that. You want to make sure that you have the infrastructure to be able to deal with it, as well as having maybe a big customer that might be very costly to service and support, and to acquire, and then they go out of business or something like that. All these things are part of cost of doing business when you go after a large customers, hence why it’s a good idea to have the internal resources, the people, the money in the bank, the expertise, to go after that kind of of a customer. Now as Hiten said it, once you’re in that situation, there’s really not that much that you can do. You can look at the contract and demand, you can threaten them either with pushing the off button and stopping service or with legal action. You could lawyer up and go after them, and fight, or PR up and be like, I’m going to publish this big blog post. I’m going to write a whole thing about my bad experience. But the question is usually small teams, small companies, startups, they either don’t have the resources or the expertise or the appetite to really go into a big fight. Turning off the services is a simple fight. It’s a simple thing to do, but really lowering up and taking legal action can take a ton of time, resources, energy, focus, money. Most startups won’t have that. Same thing also with PR battles. If you’re a genius at that and you have fun picking fights, maybe the opinion types with your prior customers, not always a great idea. It’s just one of those things that might not be advisable depending on who you are and what your situation is .You might have to just suck it up and move on with life, cost of doing business. Sometimes a big customer might do something terrible and the best choice for business and for your sanity might just be to eat the shit sandwich and move on with life. Just take it as a loss and move on versus a pouring a lot of attention, energy and fight into it. I think the better part of this episode, we might want to switch into the prevention part. Which, one, is obvious advice. Try to not rely on one customer. Try to have as many customers as possible. If you go after really large customers that pay huge amounts of money, make sure that you have a really good grasp on the payment structure. People would be surprised how many startups have closed large deals. Upon me asking what the payment structure was, they really didn’t have a good handle on it. They were so focused on the total contract value. “Oh, this is a $250,000 deal. Awesome. When are you getting the money and how?” “Well I don’t know”. It really, literally like not [inaudible] would be like, not quite sure. Or they would guess. I could just tell people, “Well they’re gonna pay the week where we started, they started using our software”. Really? Is that in the contract in those words? Then they go, “No, but isn’t that normal?” It’s like no, it’s not normal.
Hiten Shah: One thing I suggest is literally asking for payment up front.
Steli Efti: Yes, yes.
Hiten Shah: If you can do it, do it. There’s nothing wrong with that at all, just do it. Ask for payment upfront, please.
Steli Efti: You should always ask for a payment up front. You should incentivize. In some businesses, I’ve seen this and I’ve advised people do this, in certain circumstances it should be mandatory. It’s not even optional. You always have to prepay for a whole year, that’s the way if you want to be a customer of ours, this is the way this works. You might lose some potential customers, but you might have a much more stable business and much healthier business. In other markets, it’s harder to do because it’s not the way that your competitors are doing it. It’s not the way the customer is used to buying or capable of buying. But you should always, always push as hard as you can for prepayment, pay upfront. Maybe you have to incentivize a little bit. Maybe they get a better deal in terms of a better price if they pay up front. Maybe they get better service. Maybe they get some support for free. Maybe they get access to certain features. Whatever you have to do to incentivize your customers, you should always heavily push for them to pay up front. Especially in the early days, cash is king. Cash flow is really important and most one, two or three person teams that at the very beginning that you can afford to lose a little bit of money in the long-term, but having great cashflow money always comes in even before you start servicing a customer, that’s going to put you in a so much more of a strong, healthy position than other way around where you set them up, you onboard them, you customize the software, you travel there 10 times, you have a million calls, you put together PDFs, you sign contracts, you do all this work that costs money. Then you start servicing them and then you’re like, “Well, where’s the money?” Then you send them an email and it takes them two weeks to respond and be like, “Well yeah, we’ll typically pay vendors 90 days after whatever,” and then even in that case, you know, 90 days are gone. Money’s still out there. You send an email, it takes them three weeks and then they say, “There was an error in our bookkeeping. We should have this done in the next couple of weeks,” and you know you’re dying a slow death while they couldn’t be bothered by this. This is actually standard practice. Don’t think this is like an exception or something that’s just unreasonable, only a terrible company would do this. Most of the fortune 500, most of the really notable great large organizations are going to squeeze their little vendors as much as they can on payment terms. Ask to be paid upfront, push to be paid upfront. It’s going to put you in so much stronger position to not have to be in a situation where your business might run out of money. You might have to fold up your business because the customer decided not to pay you or pay you way too late.
Hiten Shah: That would suck. Yeah. Just suck. That’s the position people get themselves in. I think like the contract really matters. Getting paid up front is a critical component if you can do it, and, like you said, you can incentivize it if you need to. Look, the part of this is psychology. People are just not willing to ask for things. They’re not willing to ask for the money upfront. They’re not willing to put certain terms in their contracts. Essentially when you do that, you’re devaluing the service you’re providing, and that’s not a good idea. You’re providing a service to people or you’re providing a software, whatever it may be. Make sure that you’re taking care of yourself too. Make sure that you know that they’re not doing you a favor. You’re not doing them a favor. There’s a transaction there. People are giving you money, you’re providing a service and make it very clear that’s what’s happening, and ask for what you need. You will generally prevent a lot of these kinds of issues because one way you’ll prevent it is you just won’t get the clients that won’t exempt your terms because if they won’t accept those terms and then they might be the type of client that will will pay you eventually. Plus, if they think they can’t pay you, they won’t pay you.
Steli Efti: This is probably the biggest one, is that if you act nicey, nicey and super reasonable, and you always wait two months until you’ve voiced that there’s something that they didn’t do, like pay you or something like that. If they think they can get away with it, they will take advantage of you. It can be a harsh work world out there and businesses will take advantage of you if they think they can and they’ll get away with it. Make sure that companies are in business with you, respect you more than liking you. Liking is nice, but respect … This is a business transaction and they need to get the impression that you’re confident, that you’re successful, and that you’re experienced. If you ask for something and they don’t like it and push back it’s not the end of the world. That’s how adults do business. But most founders, you hit the nail on the head, Hiten here. Most founders lack the confidence to ask for the things they need and then they get what they deserve, what we all deserve when we do this mistake, which is way less than we need. Make sure that you’re confident in those interactions, those conversations, especially on the closing side of things. A lot of times founders are like, I don’t want to ruin the romance of this great conversation by having to discuss terms or pushing them to prepay, I don’t want to, so I’d rather not discuss this. I’d rather not bring this up. You’re an adult. This is adult business. Bringing up how are they going to pay, when they’re going to pay this part of it. If it ruins the romance, and if the customer doesn’t want to buy because you had such a great brainstorming conversation about the longterm impact that the relationship could have, and then you ruined it with bringing up details and terms, then they would have been a terrible customer at the end. Please, please, please be confident and please always get paid. That’s it from us for today.
Hiten Shah: Get paid.