Unlimited PowerPoint templates, graphics, videos & courses! Unlimited asset downloads! From $16.50/m
  1. Business
  2. Business

Collections: A Comprehensive Guide


Most freelancers dread collections.

We’ve been promised this money in good faith by clients we’ve already worked for and we shouldn’t have to chase after the funds to get payment. But collections are a necessary evil for any freelancer who doesn’t get payment in full before starting work (and those rare freelancers may still face difficulties from bounced checks).

It's important when working your way through the the collection processes to know when to send a nice collections letter versus a letter with punch. You need to have a handle on when to use a collection agency and when to fight for the money your owed with your own two hands.

Start With a Nice Letter

There’s always the possibility that your client honestly forgot to send along payment after receiving your invoice. If that’s the case, you don’t want to get too aggressive too quickly — there may still be a chance to salvage your relationship with the client. It might seem a little optimistic to assume that, but go ahead and send a civil letter reminding your client of a missed payment. It’s tempting to send emails, but if you’re not receiving a response, you need to send a letter in the mail. You may also want to phone your client.

If you get the sense that payment is not forthcoming because the client doesn’t have the money to pay you (there can be cashflow problems in any client’s business), it can be worthwhile to offer to discuss revising payment terms. You can offer to set up a payment plan: by taking your payment in chunks, rather requesting it all in one go, you have a better chance of getting at least some of the funds out a client who suddenly finds himself unable to pay his bills. Because a situation like that can go from bad to worse, getting at least a few payments while you can makes sense. A payment plan doesn’t preclude other collections options if the client in question fails to meet the terms of any new payment plan.

Don’t be apologetic or passive in any letter you may send, though. Presumably, you have a contract where this particular client agreed to pay you a set amount of money. You’ve done the work. You’re in the right and if you don’t stand up for yourself, all the letters in the world won’t help you.

Less Nice Letters

If a civil letter doesn’t get you the payment you’re owed, it’s time to proceed to a less nice letter. This letter should serve as formal notice of the next step you’re prepared to take — like sending the bill to a collections agency or filing paperwork in your local small claims court — if you don’t receive immediate payment. You should send what amounts to a final warning through certified mail, so that you can be sure that your client receives it.

You should send what amounts to a final warning through certified mail, so that you can be sure that your client receives it.

There are a few ways to add a little punch to a letter asking for payment. Because a company may think of a freelancer as someone without a lot of power, showing that there can be a few more consequences for failing to pay than they might expect.

Listing a problem client on a site like Business Beware lets you pack an additional punch, to the point that Business Beware provides users with a certain number of warning letters to help inform a non-paying client as to what you’re prepared to do if you don’t receive payment.

You can also have a lawyer write up a letter on your behalf, formally demanding payment on your behalf. You’ll want to choose a law firm that generally deals with business issues, preferably on the behalf of small businesses.

At this level, you’re reaching the point of no return when it comes to any chance of working with this client again. But, honestly, if you’re needing to jump through so many hoops in order to actually get your payment, why would you ever want to work with this client again anyway?

The Collections Agency Option

Turning an unpaid invoice over to a collections agency can be a difficult decision: On one hand, the collections agency will have more time and resources to invest in getting your payment. But, on the other hand, the collection agency will take a portion of the money they collect as their fee. Since your time is valuable, though, it’s worth considering a collections agency if you can’t get the client to pay on your own. There’s the added bonus that you may not need to deal with angry clients when demanding payment.

Collection agencies require a copy of your unpaid invoice and your contract with the client. If you don’t have a contract, most agencies will be unable to work with you. Many agencies will take invoices down to around $30, making this strategy more cost effective for freelancers than small claims court.

You do want to research any collections agency you consider working with. Some have poor reputations that you do not want attached to your freelance business. Ask for referrals and references, as well as searching for the company’s name online. You can also ask the agency you’re considering about their strategies. Many are able to add information to credit reports, something that an individual freelancer would struggle to. That can be a big incentive for a client to pay up because a damaged credit rating makes it harder to do business.

When Small Claims Court is Worth Your While

Pursuing payment through small claims court can be time-consuming, making it a last resort. Furthermore, it’s not always worth it if you’re trying to collect just a few hundred dollars — after filing fees and other expenses, you can lose money on collecting, even if you get paid in full.

If you’re updating your client on the process, you may be able to get to this point and convince him that paying is a better option than going through the legal process.

The laws governing how a small claims court operates differ from state to state. If you’re trying to collect from a client who isn’t local, you’ll also be facing a question of whether you can pursue the issue in your local court (your contract should hopefully have laid out this issue ahead of time).

In general, though, you’ll need to pull together your evidence, such as the unpaid invoice, any certified letters you’ve sent and the contract the client signed. It’s not impossible to collect without a contract, but it is significantly harder, since the situation can turn into a ‘he said, she said’ match. From there, you’ll file your claim and pay your filing fee at the small claims court. If you’re updating your client on the process, you may be able to get to this point and convince him that paying is a better option than going through the legal process. You’ll receive a court date and present your evidence to a judge, who will make a decision for your case.

Usually, you can’t have a lawyer represent you in small claims court, but it is worth consulting with one to make sure that you’re doing everything correctly — and that you understand the local laws and processes.

Bad Money After Good

There may come a point in the collections process when you realize that you’re just not going to get your money. There’s no point throwing your time or resources at collecting on money you’re owed if there’s no hope of getting it.

If a client disappears off the face of the planet, there’s little that you can do. If you live near your client (an increasingly rare situation), it may be worth going by their physical address — but a post office box or empty office just isn’t going to help you. You may have to write off the amount you’re owed at that point.

If a client is declaring bankruptcy, you may wind up with absolutely nothing: service providers are usually the last creditors to be paid in bankruptcy proceedings. On the off chance that you’re offered a settlement, even for significantly less than what you’re owed, it’s probably worth taking (though, of course, you should check with a financial expert first).

When you’re trying to decide if you should stop pursuing payment, remember that your time is worth money. If you’re personally having to chase down payment and it seems unlikely you’ll get it, you probably would do better to go land more client work and get paid for that.

The Best Time to Fight the Collections Battle

A lot of the steps in the collections process are a lot easier if you lay the groundwork when you’re first working with a client. Since you can’t tell who will be easy to work with and who will cause you problems, you need to follow the same process with each client you work with.

You need a signed contract or letter of agreement for every project you work on. You need multiple ways to contact each client you work with. You need to hold off on turning over the completed project until you’ve received payment. This is a mantra that any experienced freelancer knows — but that few enough follow. But changing your process can reduce the number of times you need to go through the collections cycle.


You should always seek independent financial advice and thoroughly read terms and conditions relating to any insurance, tax, legal, or financial issue, service, or product. This article is intended as a guide only.

Photo credit: Some rights reserved by tony4urban.

Looking for something to help kick start your next project?
Envato Market has a range of items for sale to help get you started.