How Fractional Workers Can Manage Late or Non-Payments from Clients

About the Author: I’m Craig Finster, a Fractional CFO for early-stage tech companies. Previously I’ve served as CFO for everything from small startups to publicly traded companies. I've experienced the challenge of late payments from both sides of the table. I've dealt with this issue both as a worker getting paid late and on behalf of a company that paid late. This unique perspective has taught me valuable lessons about managing payment issues - an especially critical topic for fractional workers who lack the traditional protections of full-time employees.

‍

‍

For fractional workers, late payments and defaults aren't just occasional annoyances -- they can be recurring challenges that require strategic thinking. Unlike full-time employees who can file wage claims with state authorities (such as California's Labor Relations Department), contractors and fractional workers must largely fend for themselves. Add to this the ongoing nature of fractional relationships compared to project-based consultants, and you have a situation that demands careful handling.

It's also a topic that benefits from collective wisdom. While every situation is unique, there are repeating themes we can learn from. Most importantly, it's better to think about these issues in advance, before things become tense and emotional.

In this article we’ll cover a) analyzing the situation, b) preventative measures, c) dealing with late payments when they occur, and d) lessons for the future.

‍

Situational Awareness - The Company, Your Client, and You

Why Companies Pay Late

Understanding your partner's why can help you address problems. Here are some common reasons why companies pay bills late.  Figure out which applies in your situation (it can be more than one or something not identified here):

• Administrative delays - The company is disorganized. I have a colleague who worked for two founders who had minimal other administrative staff and always paid late. They were just disorganized. My friend referred over a CFO to help get them on track and that fixed the late payment issue.
• Bureaucracy - The process is slow because the company is large or has been growing rapidly and has overwhelmed its processes. I once worked with a Fortune 500 client whose payment terms meant payment came 60 days after the first of the month following invoice receipt (the 60 day lag is often called net 60) - meaning payment didn’t happen until  up to 120 days after work began. Be sure you understand your client’s invoicing process.
• Ambiguous terms in the agreement -  If payment terms are unclear in the agreement, the company can be either unaware of when they need to pay, or taking advantage of the ambiguity for their benefit.
• Cash flow problems at the client - a source of non-payment and one that often contributes to frequent late payments. There fundamentally is not enough money to pay all the bills on time. This can be cash flow driven or balance sheet driven. Companies have a variety of strategies for stretching their cash, including:
  • Pay the loudest/ biggest complainers first
  • Pay smaller bills to deal with fewer people
  • Pay the mission-critical services
  • Get as much float as possible all the time
• The counter party is dishonest - In my experience, this is unusual. Most people are honest and want to do the right thing, but I have encountered people who make an agreement never intending to pay. You figure this out pretty fast. 

The best companies will communicate honestly with vendors about their situation when things get tough, but many do not.  You may have to proactively reach out.

Know Your Clients

The next thing is to know your clients - Who are they? Are they often cash-tight? These come in multiple varieties: high-growth companies of all sizes, equity funded start-ups, or declining businesses. Do you have a history of working together? What is the relationship with other employees/ contractors? Some indicators that things are going well for your client: recently raising funds, marque new clients or sales, hiring or other expansion. Some signs things are getting risker: loss of a major client, layoffs or significant cost cutting, or other vendors being paid late.  You can also ask e.g. “how is business going?” Try to be aware of the financial context in which your client is operating.  

Know Yourself

Finally, know your limits. How much credit are you willing to advance? How much can you afford to lose? What are your alternatives - how full is your pipeline/ calendar? Setting your target thresholds in advance can help limit your risk.

‍

Preventative Measures - Setting Expectations, Contract Terms, and Tooling

Set Clear Expectations

The beginning of any engagement or new situation is crucial for setting expectations. Remember that doing nothing still sets an expectation, so be purposeful in what you establish. It's OK to be quick to call your client when the first payment is late.

Consider Adding Fractional Friendly Contract Terms

There are terms you can ask for at the start of the engagement that will make it easier to prevent or deal with chronically late payments.  Consider incorporating these terms from the start:

• Retainers for cash upfront. Lawyers often do this with new clients. The first few invoices are paid out of the retainer until it is depleted and then invoices are paid on a set schedule like every 15 days (net 15) or every 30 days (net 30).
• Evergreen retainers or deposits. These are like a deposit on an apartment or office lease. The deposit stays in place until the relationship ends. Be sure to separate this cash from your other operations. It is still the client's money.
• Fees on late payment. Just remember, you must be able to enforce them. Late fees often become another negotiating point but give added financial incentive to pay on time.  A discount for paying early is a similar idea.
• Shorter payment terms and increased billing frequency to reduce float. Consider invoicing twice a month on Net 15 terms (which means full payment within 15 days of invoicing) instead of invoicing once a month on Net 30 (meaning full payment within 30 days). Your starting agreement should detail both the frequency of invoicing (such as weekly, 2 times per month, 1 time per month, etc.) and the amount of time the client has to pay the invoice (due at invoicing, Net 15, Net 30, etc.)
• Risk-adjusted pricing. Sometimes if I am worried about getting paid, I just charge more.

Remember: additional terms create friction in winning the work, so balance protection with practicality. We can look to other industries for examples.  Liquidation advisors often require 100% upfront payment from their high-risk clients who are near insolvency, while lawyers commonly use retainers while building trust with new clients.

Streamline Your Process

• Invoice promptly -- payment terms usually start when you bill, not when the time period ends.
• Utilize modern tools like QuickBooks or Harvest to speed up your invoicing and therefore cash collection cycle.
• Consider tools like Agree that offer payment as part of the contract signing workflow. 

‍

When Payments are Always Late

Stay Professional

First and foremost, maintain professionalism. It's a small world, and today's late-paying client might be tomorrow's referral source. I've seen multiple referral engagements come from what clients described as "the most professional delivery of bad news" they'd ever received.

Have the Hard Conversations

Initiate honest conversations about the situation.  Something simple like: "Do you mind if we have a conversation about this? I notice you've been late with your payment 3 times now." That kind of thing.  Keep trying to understand why your client is not paying on time and see if you can help find a solution.

After a phone call, be sure to send a simple follow-up email along the lines of: “Just to make sure I understood our conversation correctly, we agreed that XYZ in regard to my past due invoices.  Let me know if you agree or if I misunderstood something.”  Every now and again, there is a misunderstanding.  Writing it down helps to document the conversation for future reference and removes ambiguity

Watch out for "in for a penny, in for a pound”  also referred to as the sunk cost fallacy.  Establish clear continuation or exit points. Beware of thinking that you have a debt owed to you by the client, and if you just keep working, perhaps the client will be able to pay it off.  Try to look at the go-forward effort with a fresh perspective.  It’s hard to do, which is why there are so many expressions around it.

Negotiate New Terms

Consider creative solutions that meet both parties' needs, such as:

• Upfront payments for any new work and a payoff of the old debt over time. This is a restructuring of the cash flows.
• Converting debt to equity (but know in advance if you want to own part of a cash flow constrained business).  This reduces the current cash need for the business but gives up some future upside to you.
• Paying a one-time bonus at an important milestone.  This is another example of adjusting cash flows such that less money is paid now, but the future payment is higher than it would otherwise be.
• Using modified payment schedules such as 50% payment upfront, 50% invoiced.
• Adjusting payment terms to fit inside another contract for your client’s cash flow. If your client is paid over a longer period of time than you are, it can create a working capital challenge for your client if there are not sufficient cash reserves. An example would be if your client invoices a large customer once per month and is paid net 60, but you invoice twice per month on Net 15.

Know When to Walk Away

If you can't find a way forward:

• Be polite but firm in your termination.
• Try to reach the walkaway point before hitting your absolute breaking point because you want to leave enough of your goodwill to professionally transfer your work
• Maintaining your pipeline maximizes your BATNA (Best Alternative to a Negotiated Agreement) 

The Last Resort: Collections and Litigation

 If you must pursue legal action, understand that:

• This fundamentally changes your relationship with your client.
• Demand letters from attorneys signal a serious escalation.  A demand letter is one from the lawyers that is asking for something (aka a demand) such as pay me now.
• Collection agencies take a significant fee of anything collected, often ranging between 20% and 50%.  It is also a little awkward for a fractional worker to send an account to collections because you have an ongoing relationship with the client and most fractional workers are not set up with a collection agency.  It’s more common for a business to do so.  It is also less awkward if it happens at the end of the relationship.
• Documentation is crucial – and assume every email and text might be read by opposing counsel a year later. 
• Legal processes are expensive in terms of both time and money.  Even more than you think. Lawyers can range from $500 per hour to more than $1000. You may be able to get someone to work on a contingent basis, meaning they get paid if you win, but not always.  Also, look at your agreements and see if your contract describes who pays in the event of a dispute: sometimes the loser pays for both parties’ fees, and sometimes each party bears their own cost.  If you do go down this path, you can ask your lawyer for an estimate of the time and expense to pursue and importantly, what they think your chances of winning are.

Where to From Here? Lessons for the Next Time

1. Prevention is your best strategy – thoroughly vet clients and set clear terms.
2. Maintain professionalism even in difficult situations.
3. Be creative in finding solutions that work for both parties.
4. Know your limits and when to walk away.
5. Keep good records and seek advice when needed.

Remember: while every situation is unique, payment challenges happen to all kinds of companies and service providers. By preparing in advance and approaching issues strategically, you can minimize their impact on your business and maintain professional relationships even through difficult times. Get advice when you need it – other people have been down this road and can offer valuable insights from their experiences.

‍

‍

If you’re looking to hire a fractioAnd if doing fractional work sounds exciting to you, or you want to learn more, check us out at https://fractionaljobs.io. We've got plenty of live jobs from startups looking for senior-level fractional talent.