[Editor: I felt this guest post was very informative for readers and consumers to understand how a small business might decide to pursue people over debt.]
Small claims courts are part of our legal system. They help resolve minor disputes without engaging in lengthy (and often expensive) lawsuits. For example, when it is clear that a client does not want to pay, you could take them to a small claims court.
Unlike a civil suit where you hire a lawyer to represent you, it is up to you to initiate the process of filing a matter in small claims, following up, and proving the case. Although it may seem tedious, new technology is making the process much easier, and it is also a lot less expensive than handing your case over to a lawyer.
We will help you understand how to make effective small claims. But first, here is why it is crucial not to let defaulting customers run scot-free.
Don’t let defaulting customers get away with non-payment
Whether you run a small business or are a freelance worker, not all your clients will settle their invoices on time. However, because you trust them and expect payment in the future, you will consider yet-to-be-paid invoices as a type of asset. In business terms, it is called accounts receivables.
Sometimes it is beneficial to allow the accounts receivables to accrue. You could strengthen a profitable relationship, and you will cut some costs. But accounts receivables also hold up money from your practice and reduce your profits.
If defaulting customers get away with it, your business could be cash-strapped, and you could end up closing shop.
How do you avoid that?
Take them to small claims. Read on and learn when to take a client to small claims.
When the value of the unpaid invoice is within the small claims limit
Small claims courts are just that. They are an avenue to settle disputes that are neither complex nor high-value. For example, some of the suits you may find in these courts include tenants suing a landlord over a non-refunded security deposit, a neighbor demanding compensation for damaged household property, or customers ordering refunds on returned items, and so on.
The California limit for filing small claims is $5,000 if you are incorporated as an LLC or Corporation. If the standoff exceeds this amount, you could file a limited civil suit or a lawsuit.
When you have a strong case and can identify the defendant
Do not rush to small claims unless you have a clear defendant and evidence to show that the client is avoiding payment. Whether it is an individual or a registered entity, you should be able to identify the client by their correct name and locate their address. Also, you should have the following:
- Records to show that you delivered services.
- Documents to show you requested payment by a specific date.
- Records to show that you informed the client of the status of the defaulted invoice and any fees or penalties that accrued.
- An advisory that you could pursue legal action if the invoice remains outstanding by the deadline
Remember, the burden of proof lies with you. Therefore, make sure everything is in place before you start.
When it makes financial sense
Although it is not as expensive as a full suit, filing small claims entails some costs. As the plaintiff, it is your responsibility to meet the legal costs of filing and following up. Therefore you should be ready to settle the associated fees and bills.
Is the outstanding invoice sufficient to meet and exceed the costs incurred when filing the suit (including your downtime)? If yes, then it could be a viable option. If not, you may reconsider.
When the client can pay
There is no point in pursuing legal action against a client who has declared bankruptcy. You will spend your time and money and get nothing out of it. Even if the court rules in your favor, you cannot enforce the judgment.
Consider selling the “asset” to a debt collecting company. Then spend whatever you get and your efforts on activities that are more profitable for the business.
Finally, take a client to small claims when you are willing to go the whole mile.
You could be nodding in agreement as you check through the above stipulations of taking a client to small claims. However, even if you receive a judgment in your favor, the court will not actively pursue payment on your behalf. Therefore, you should be ready to go the whole length and prepare to enforce collections.
Consider strategies like a lien against property owned by the client and other debt collection measures. Although such measures could be effective, they could also dent your reputation and scare away some clients. So you must carefully weigh your moves.
Taking defaulting clients to small claims could help significantly reduce defaulted invoices and boost your cash flow. But make sure everything is in place, and it is worth the effort.