One topic that I’ve recently been discussing with small business owners is problem customers, and more specifically, customers who receive a product or service and then choose to withhold payment.

Aside from start-ups, virtually every small business owner has a story to tell about a problem customer. Even with the best product or service in the world, it seems that the time will inevitably come when the customer from Hell engages with your business.

When this happens it can shake even the most hardy small business owner to the core. Feelings of stress, worry, anger, fear, regret, etc., abound. Cashflow problems for you often follow – leaving you unable to pay your suppliers, your staff or yourself.

Assuming it’s a matter of ‘when’ rather than ‘if’ you have to deal with the customer from Hell, then here are some tips to help you better handle the situation and to minimise your exposure to financial losses and reputational damage:

1. Qualify potential customers

Before you agree to provide a product or service to a customer, check for warning signs. Is the customer from a sector, or industry that you’ve previously had problems with? Anything concerning in a Google search? Can you find them on Companies House to get to know exactly whom you’re dealing with?

2. Use terms and conditions that a solicitor has prepared for you

Don’t use terms and conditions downloaded from the internet. Bespoke terms and conditions aren’t cheap, but the investment could easily be worth it if one day they make the difference between being paid or not paid.

3. What and when

Ensure your terms and conditions clearly state how things will be handled if the worst happens, including timescales so that problem cases don’t drag on for longer than necessary.

4. Associated fees and costs

Ensure your terms and conditions reserve the right to apply late payment fees and collect costs associated with debt recovery. These clauses will allow you to incrementally increase pressure on the problem customer and hopefully get paid before going all the way to court.

5. Get a signature

For higher value transactions, ensure you and the customer sign and date the terms and conditions – ideally hard copies, or via secure legally approved systems such as Adobe’s eSign service.

6. Keep your side of the deal

Deliver your products and services exactly in accordance with your terms and conditions. If you haven’t kept your side of the deal, then why should your customer?

7. Keep records

Ideally your IT systems should record what was delivered and when so that you can produce an audit trail if required by your solicitors, e.g. when preparing a solicitor’s demand for payment letter.

8. Deliver incrementally

By breaking a project down into periodic deliverables and using staged payments, or even up-front payments, you can reduce your financial exposure significantly.

9. Use Direct Debit if appropriate

With a mandate in place to collect money from your customers you are no longer reliant on them to do the work of paying you and your fees avoid becoming ‘yet another thing on the to do list’ and are less likely to go overdue, and you’re therefore less likely to have to exercise your provisions. GoCardless is a popular option.

10. Talk to your solicitor

If it looks like things might be going wrong then talk to your solicitor sooner rather than later. Ideally, talk to the same solicitor who drafted your terms and conditions. They will be able to talk you through the costs of taking legal action and the likely outcomes.

11. Communicate with your customers throughout delivery of the product or service

Customers can be such a rich source of information about your product or service is perceived and how effectively it does or doesn’t solve their problems. That feedback can be a goldmine of opportunity to make your product or service the best in your industry. And of course, if you continually ask for feedback you will stand a better chance of spotting a potential problem. You can then take action to put things right sooner, and hopefully reduce the chances of a full-blown dispute arising.