Client not paying? Sometimes, it’s best to sidestep a lawsuit by first sending a ‘demand letter’ written on your lawyer’s stationery.
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Recently, I related to Entrepreneur readers how awful 2018 was for my business: ups and downs, mostly downs: My business partner Dan Foley and I were taken on a veritable rollercoaster ride of big bets and big busts.
One of the only good things that happened last year? We learned a lot from lawyers. The reason was that all of our blockchain clients and security token offerings (STOs) needed legal counsel. So, we went looking for the folks who could help them.
And, not only did we help clients connect to attorneys, but we also collaborated on our clients’ legal documents: private placement memorandums (PPMs), purchase agreements and white papers. The takeaway? We learned firsthand the importance of setting aside cash for lawyers, even if you never think you’ll be in trouble.
Here are four other ways new business owners can make sure they’re covered legally:
1. Have agreements with your business partners.
When Foley and I partnered up, we were green around the gills. Neither of us knew anything about running a business. But we knew enough to draft up and sign articles of organization and make sure we submitted incorporation paperwork to the right entities.
Why does this matter? Because a business divorce can be very messy (Remember how Apple co-founder Steve Jobs, in the ’80s, got kicked out of the company by his newly appointed CEO)?
In the event that you and your business partner(s) have a falling out, it’s best to keep things civil. There is a right way to separate from your business partner and the wrong way. Doing it the right way ensures that everyone gets what he or she is owed — nothing more, and nothing less. You can find templates for all sorts of business agreements and contracts at sites like RocketLawyer, LegalZoom and PandaDoc.
One of our business partners last year actually turned out to be nefarious and tried to cheat us. But because we had detailed agreements in place, we convinced the partner to back down.
2. Draft and sign contracts with all your vendors.
Never assume people will play nice just because you’re paying them. You need to have contracts in place with everyone who works for you, not just full-time employees.
If you’re like most small business owners in the 21st century, then you’re probably relying on a number of part-timers and freelancers to move the needle. Make sure you have vendor contracts for all those 1099s. Solutions like HelloSign, DocuSign, and SendDoc make it easy to send, share and electronically sign contracts.
We’ve personally never had any problems with our vendors because we do our best to pay everyone fairly and on time. But we’ve heard horror stories from some of our colleagues — everything from defamation to lawsuits.
3. Send your clients contracts and ask for half up-front.
This should go without saying: Never do handshake agreements, not even with friends and family. No, sending a contract and expecting it to be signed by clients before you begin work for them is not insulting. It’s just sound decision-making. No matter who your clients are, always layout your deliverables and payment terms in a statement of work (SOW).
And, while some municipalities, like New York City, have recently passed laws to protect freelancers, the truth is that clients who don’t pay on time or at all are a dime a dozen.
Fortunately, an easy way to increase the odds that a client will pay (and, a litmus test as to whether they’re trustworthy) is to simply ask for half up-front. Clients who aren’t totally trustworthy will hem and haw and complain, while decent human beings will say, “That sounds fair.” Good invoicing solutions include Quickbooks and Freshbooks.
4. If clients don’t pay, send them a demand letter.
In a worst-case scenario, where a client owes you a considerable amount of money and refuses to pay, you’ll have to resort to small claims court. If your contracts are airtight and you’ve kept records of all your interactions via email, chances are you’ll win the case.
But the legal fees involved in hiring an attorney to sue a nonpaying client aren’t exactly low. In many cases, you may end up spending a significant amount of money just to recover your money, which isn’t exactly the best investment.
That’s why your best bet may be to send a demand letter, first. A well-written, official-looking letter from an attorney who specializes in recovering payments is much more cost-effective than actually taking anyone to court.
It pays to be prepared.
For new business owners with tight budgets, a lawyer may seem like a luxury. You may be tempted to draft up your own contracts using templates. And that’s just fine … until it’s not.
When it comes down to it, having trustworthy legal counsel is probably one of the best investments you can make in your business in the long run. So, get some references, check your bank account — and lawyer up.