How should your law firm handle clients who don’t pay their bills?
First things first, it’s important to dispel the myth that it is good client service to agree to let people not pay you on time or to just slash your fees when the economy turns south. Just because that happens, it doesn’t mean that law firms need to accept less from their clients when it comes to money.
You should recognize that it’s a delicate situation during this economic and health crisis, and you should keep in mind that clients that might be completely shuttered right now. Every situation is going to call for a unique response from you. You have to think about long-term relationships now, but you also have to think about your business and your law firm and your bottom line.
However, I don’t think that you have to look at accepting delays in payments or reduction in fees as good client service in a hard time. You can certainly push back on those things and do it in the right way. Ultimately, as lawyers, we’re running a business too. We have commitments ourselves, whether it be rent or the salaries of our employees.
A lot of companies will continue to pay their suppliers and other vendors on time because it’s tangible products that keep their business moving. Legal services, on the other hand, tend to be long-term necessities. We’re trying to prevent problems for our clients. We’re trying to secure protection for clients.. These are not things you need day-to-day to operate your business in the trenches. These are things that are important to do. But again, I think this is where some of your clients may feel they can delay payment or ask for reduction in fees because, ultimately, they don’t view your services as critical to the operation of their enterprise.
That being said, I think it’s very important for lawyers not to just accept the fact that their clients may view them as non-critical, but to work with their clients in a way that can make sense for the short term, and to preserve long term relationships.
Our firm is fortunate in the sense that there’s really not one client that makes up a significant portion of our revenue. If somebody were to come to us and say that they can’t afford the fees right now or they need to be 60 or 90 days out on paying invoices, we’re able to push back on that because we have other clients that are available and can pay us. So, there’s a little bit of flexibility we have in our bottom line because we don’t have to accept that situation.
Now, if you have one or two clients, you may feel like you have less of a negotiating position. Now is a good opportunity to reconsider that business structure, because it can be really problematic for your firm. You really shouldn’t be that dependent on just a client or two. You should have more of a diverse practice.
In my experience, I have found that clients fit one of two different categories when it comes to requesting delays in paying bills or reductions in fees.
1. Clients who just don’t pay their bills.
There’s one category of clients that just will not tell you they’re not going to pay your bill. They will continue to request services, you’ll continue to send monthly invoices, and all that happens is the checks just don’t come in as they used to. That’s a problem and that’s something you have to be on the watch out for.
In the time of the coronavirus, you need to be very careful about clients that were usually good about paying their bills and all of a sudden stopped paying on time because that’s a sign something’s wrong.
We had an experience like that here, and it wasn’t even necessarily coronavirus related. We had a client that was very, very good about paying monthly invoices and suddenly stopped paying at the beginning of this year. After three months without payment, I had to reach out to the company and was told they would look into it. A month later, I had to reach out to the CEO directly, but we still weren’t getting our checks. At that point, we had to let our client know that we would no longer accept new work from them. It wasn’t until I let them know that we wouldn’t be doing their work that we finally got payment.
I worked with this clients for years and we had a really good relationship, but at the end of the day, I have employees and bills of my own to pay. It’s a very tough decision because if I say to the client, which I did, that we’re not going to work anymore until we get paid, there’s certainly a possibility they walk.
I bring this up and I tell you this story because I think it’s very important to watch your accounts receivable in this time. Normally, you might have done what I did, which is that you have a good client and you realize they didn’t pay on time like they normally do and you let it slide. I don’t think in the time of coronavirus you can give people that much leash. I think that if the payment doesn’t come in on time, it should immediately raise a red flag. You should immediately email the client to ask them if there’s any issue with the payment. Don’t invest tons of your time and effort in matters if you don’t know if you’re ever going to see payment.
2. Clients who ask for a delay in payment or a reduction in fees.
The second group of clients will come to you and ask for a delay in payment or a reduction in fees.
I was on a conference call a couple of weeks ago, and attorneys were saying that they were receiving requests to slash hourly rates as much as 40%. I’ve heard from other clients that they’ve gotten orders for pencils down, meaning stop working on anything that isn’t critical. So that’s all fine and well. But if a client comes to you and says, “Hey, I want to pay half of your normal rate, will you do it for me?” I think that’s a very dangerous thing. I think it arguably cheapens your service and your brand.
The other thing that happens, is clients come to you and say, “Hey, I need to pay you in 60 or 90 days, not 30.” I don’t think that’s acceptable either because my bills are still due every 30 days. I’m not a bank, you know, and I don’t think your law firm is a bank.
Here’s how I would handle those kinds of situations.
One, I would explain to the client that we’re not able to offer a significant reduction in fees because we’re we have commitments and our margins aren’t that high. Maybe you could offer them 10% off. Show that you have some wiggle room, but not a lot.
Additionally, you might just have to do less work for that client. Just work on the critical matters until they get over to the other side of this thing. Narrowing down the scope of representation and helping people through the time might be a good way to do it.
I’ll be honest with you, there’s not many law firms that I’ve seen do work that do work really super efficiently and narrowly for clients. Normally, we take a very broad view as attorneys as to what needs to be done. You’re trying to protect the client from a problem on the back end or a claim of malpractice or something like that. I think you talking to a client about how you can really narrow the scope of services and agreement on the risk that may present but also the benefit of lower bills in the meantime.
The other thing you need to do is you need to really determine how much you trust somebody. In our firm, except for a few clients that basically have earned the credit with us, we require retainers to bill against if we’re billing hourly time. So let’s say that somebody has a matter and you think you need $5,000 of time to handle it. I would ask for a $5,000 retainer, and bill against it. Then, once you get to the end of the retainer, recharge that retainer to continue work. So it’s very clear early on that you have to have the money in your trust account to do work for them.
This is not a novel concept, but it is one that basically tells the client you don’t trust them to pay their bill every month. It is what it is. I think you can have those honest conversations with people.
I hope you found this episode helpful. I hope it puts a little wind at your back when you have to talk to clients about fees. We’re in the middle of a pandemic, and you have to run your business too. Don’t be afraid to have honest and real conversations. Pick up the phone, talk to clients about when they’re going to pay bills, make sure you’re on top of them.
If you have any ideas for a future show, please send me an email at email@example.com.