Today, I have a very valuable business lesson I would like to share with you. It’s all about ensuring you get paid.
Just after I set my business up in 1995, I spoke with a business owner who had recently gone bankrupt. Steven had owned a garage, which offered a very high class service to people who owned expensive vehicles and valued excellence. I asked him what went wrong.
Here’s his story and the lesson.
Gentleman’s agreement?
Steven explained that he had been ripped off, by a much bigger company he had partnered with. They decided not to pay a very large bill they had run up and gave him almost no notice. His business couldn’t cope with the impact it made to his cash flow and within 2 months, he was broke. Apparently, he believed that they would pay him as they promised, ‘if he just did one more job’ for them.
Anyhow, the reason I am sharing this story with you, is that this likeable, hardworking man offered me some great advice, which I am going to share with you. Here’s what Steven told me:
Jim, make sure you never enter into a gentleman’s agreement, where you are the only gentleman.
Wise words, but I still had to learn the hard way!
Back when Steven gave me this advice, I was in my late 20’s and new to running a business. I thought the advice was just a clever play on words. I then discovered there was a massively valuable lesson behind those wise words. In 1998, I found myself licking my wounds after a client of mine went missing, owing me over £30,000! He’d verbally agreed to pay me, I did the work over a period of 3 months, he made a ton of money and that was the last I saw of him. Had I not been financially strong, it would have wiped my business out.
Limiting your exposure to debt
As a small business owner, you have to be extremely careful who you choose to work with. You also need some rules in place, to limit your exposure and protect your business. Some people will deliberately tell you one thing and do something else. In my experience, those people are a tiny minority. In most cases, people will intend to pay you but find they can’t, because they have become victims of someone who has not paid them.
By having some sensible rules in place regarding your payment terms and sticking to them, you may lose the occasional client, who needs greater flexibility because they have cash flow issues. However, without some kind of protection in place, you leave yourself extremely exposed.
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