January 3, 2016

By: 
Rachel Strella

Small Businesses Beware: Non-Payers Can Affect More Than Your Wallet

small business challengesThere are a lot of lessons to learn in small business.

I’m glad that I have the opportunity to share some of my lessons, including legal troubles with Getty Images in 2014 – in hopes that sharing will prevent other small business owners from making the same mistake.

This past year, I learned yet another lesson and one that’s equally important because it’s something that many of us deal with… late-paying or non-paying clients.

Initial Challenge: The Delinquent Client
In March 2015, we entered into a contract with a start-up company outside of the United States. The initial agreement required a retainer. Once the retainer was fulfilled, we would bill every two weeks, and funds were due upon receipt. In the first few weeks – and even months – of our agreement, the client paid all invoices beyond the initial retainer upon receipt. As we entered the summer, my client and I began having creative differences with the approach to social media – and subsequently, the payments began to lag. By the end of June, I had to pause our work until we received payment.

Despite several attempts to recover the funds with our client, it was clear that we were being ignored. In July, we decided to research a few collection agencies to see if we could recover the funds. We decided to hire a collection company in Texas and signed a ‘no collection, no charge’ agreement in mid-July. It was then that my real problems began – and I learned several lessons including the profound difference between business and consumer law.

First, it’s important to mention that recovering funds from an international client creates an added difficulty. The company we hired charged 10 percent more to collect from a foreign business than from a U.S.-based business.

Ascending Challenge: The Shameless Collections Company
After signing with the company, we heard nothing from them. We followed up with our contact via phone and email over the next few weeks. In the first week of August, the contact told us that the client was unresponsive to their requests. He said the company would do what it could to secure the funds, but it may not recover the money.

In the second week of August, our client began asking us for access to certain documents and pages we created. We told him that he would need to pay at least half of his bill for us to consider his request. He agreed and paid half of the total balance due directly to us.

Five weeks later, we received an email from someone at the collections agency who said she spoke with our client, who claimed that the payment was made in its entirety. She asked us to confirm or deny this statement. At this point, we reviewed the collection contract and realized the company did not give us a debt recovery plan, as its collection contract required.  Without this, we considered the contract void and informed the company in writing.

From that day forward, the agency began harassing us with numerous calls, emails, and text messages – many with threats and foul language. The company even went as far as to call my family and send derogatory Facebook messages to my friends. I began making a timeline to showcase the harassment we faced from this company over a period of three months. There is no way to do justice to the unethical and horrifying treatment we received without sharing the timeline. Click here to view.

Ultimately, I hired my lawyer to handle the issue – the same small business attorney who handled the Getty Images suit. Even with a cease and desist letter from her office to our contact at the agency, the company continued its harassment for several weeks.

The lessons learned from this incident abound. To actualize these lessons, it’s important to understand how to address non-payments as well as what to do when a company is unjustly harassing you. 

An Ongoing Challenge: Non-Paying Customers
Service-based businesses, particularly those who use the cash method of accounting, often struggle with late or default payments from customers. Services are less tangible than products, and because of this, there is a transaction lag from the delivery of the service to the payment for the service.

I’ve always created a contract for my clients – even for small projects. It’s important to outline – in writing - the scope of the work, the expectations for delivery, and the fees associated with the services provided. In most cases, my clients have met the terms of my contract – including timely payment remittance. In this instance, my client was international, which posed a challenge to upholding our contract terms. It’s not insurmountable, but as mentioned earlier, it can be more costly to fight.

As you might recall, I also required a retainer from my client. What I failed to do, however, is require a refreshed retainer as the retainer depleted. This would have been a better way to ensure I was paid for my time, but it’s not always agreeable to a client. Due to the lesson I learned in this case, I will require refreshed retainers for major projects. If the client refuses, I will end the relationship and cut my losses.

In the case of non-payment, it’s wise to have measures in place for enforcement – namely, legal counsel or procedures in place from legal counsel. If you’re considering hiring a collection agency, be sure to do your homework. On the surface, we found nothing troubling about the company we hired. But, after lodging a complaint with the Better Business Bureau, we found over a dozen cases in which this company acted unethically. Also, be sure you understand the contract terms. If anything is vague, gain clarity before signing.

A Reactive Challenge: Malevolent Companies
Small businesses sometimes learn the hard way – myself included. We also sometimes mistakenly assume that we are protected by the same standards applied to consumers.

Attorney Jan Matthew Tamanini of JMT Law, LLC, explained that there are two things most small business owners don’t realize about debt collections.

“The federal Fair Debt Collection Practices Act governing the types and frequency of contacts a debt collector may make applies to consumer debt; it doesn't apply to a debt collector going after a business for debts owed to another. Some states have laws governing debt collection practices, some of which cover business transactions; those laws vary widely from state to state.

The most important law regarding business debt collections is state law, and what state law applies can be tricky where a substantial amount of business transactions happen online. The best way to protect your business is to have a conflict of laws provision in your standard agreements so that you choose the applicable law that is most beneficial to you.” 

This is where it’s vital to have a lawyer like Robert K Bratt DLA Piper who understands business law and can help determine an appropriate course of action. And, it’s best to do this proactively. 

Take Action
I understand, as much as any other small business owner, that resources are limited and it’s not always feasible to have an attorney on-hand. But, this situation taught me another lesson: to do it any other way, typically means you pay more in the long run. If I had a monthly small business subscription with an attorney including a monthly discussion of relevant topics pertinent to my small business, I would have saved myself a lot of headaches because I would have never hired this agency.  In fact, the issue with this agency prompted me to purchase my attorney's monthly small business plan.

Two cease and desist letters later, I believe the harassment from the agency has subsided. But, if it persists, we will pursue further action with one of my attorney's colleagues in Texas, where the collection agency is based and where the law provides significant penalties for the behavior the agency engaged in with my business.

There will always be lessons to learn in the small business world, but armed with knowledge – and sometimes legal counsel - we can ensure the best possible outcome.

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2 comments on “Small Businesses Beware: Non-Payers Can Affect More Than Your Wallet”

  1. In retrospect, if you could have done anything differently, would you have?

    I'm thinking it's almost pointless to hire debt collectors for non-payers. If they won't respond to your request for payment, why would they respond to harassment from a third party? Especially someone overseas... I think I would have just taken the loss and tried to learn from the mistake.

    1. Yes, I would have done things differently. Namely, ensuring I had a small business plan with an attorney who could handle this matter without the hassle. But, like many small business owners, I live and a learn. I hope this lesson is helpful to keep others from making the same mistake.

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