Every entrepreneur wants to be successful. Everyone knows to carefully consider their product or service, their marketing plans and who they are going into business with (partners and/or employees). The biggest risk of your business failing, however, may be your customers. The tendency of many start-ups and small businesses is to take whatever customers they can get. However, failing to carefully choose your customers can be the death nail of your business.

Over the years I have found several warning signs that should be considered. While any one of these may not disqualify a client, when two or more are present alarm bells should go off in your head.

Beware of the apparently successful client. Be aware of the client who shows up driving an expensive luxury car, lives in a very large house and wears fancy clothes. These things may be a sign of someone who is very successful. They also can be a sign of someone who is so leveraged that they will not be able to pay your bill. If they are running a small business, it may also mean that they are bleeding the company dry. If they are showing off their money – make sure you get some of it up front.

Beware of the RUSH. Occasionally a client will walk in the door who needs a large amount of work done in a hurry. While this can be a golden opportunity to build loyalty, it should also raise red flags. Why does the client need the work done in a hurry? Did the client simply put off doing something until it was an emergency? If so, you may have just accepted a client who is going to drop things on you at the last minute and expect you to move mountains to solve their problems. Rush projects increase the likelihood of mistakes and decrease your quality of life. Additionally, they can interfere with existing relationships if you have to delay servicing established customers.

Beware of the missing checkbook. If a potential client has taken the time to set up an appointment with you, expect that they will bring some method of payment. If they don’t have money to meet your retainer, down payment, etc., make sure that you get that money before you begin substantial efforts. This is particularly important if red flags 1 and 2 above are present. A rush project without money upfront usually means you will have a hard time collecting. As soon as the work is done, so is the desire to pay for it.

Beware of the unhappy client. While dissatisfaction with competitors may lead clients to your door, any client who freely complains about your competitor is likely to do the same about your business once the work is done. Additionally, the client may be complaining to cover the fact that the client was fired by your competitor.

Beware the client seeking a discount. People seeking a discount will often approach new or small businesses hoping the business will need the work and will do it at reduced rates. Such clients may promise to refer you to all of their friends or claim to have a substantial amount of work with your competitor’s that they will transfer over if things go well. Often, these are simply rationalizations to get a lower price.

If a client is unwilling to pay your normal rate, consider if you really want them as a client. If the discount is based on alleged large volume of work, structure your agreement so that the discount will become effective once the large quantity of work is received. Thus you are not giving a discount for someone who is only inflating the amount of work they need long enough to get you to lock yourself into a rate which you may only provide to your best clients. If you want to do work for the client even at discounted rates, consider some other benefit you may receive – some of their product perhaps – to justify the discount. This may help avoid problems if full pay clients learn of the discount.

Beware the big corporation. Large corporations can make very lucrative clients. They can also crush a small business that is not set up to deal with them properly. Many corporations take a while to pay. I have worked for Corporations that paid net 120 days. If you need a check from today’s work to pay tomorrow’s payroll, you should probably pass on the large corporation until you have the financial resources to cover the delay. Also, remember that sometimes big companies go bankrupt too. Make sure that you can survive losing the client and any outstanding invoices without going under.

Trust your gut. Above all learn to trust your intuition. If a client feels wrong, they probably are. If you need to take the client anyway, get a retainer and set clear boundaries on the work which you will be doing so that the client does not consume your resources and leave you high and dry.

Taking on the wrong client can be devastating for a company especially if it takes you too long to realize you have been had. A small company usually cannot afford to do tens of thousands of dollars of work or ship a substantial amount of product to companies only to be left holding an unpaid bill. If you need to take the client consider the following:

1. Get money up front. If any of the red flags are raised get a substantial portion or all of the money up front. If the client is not willing to pay you part now, they may be just as unwilling to pay you in full after you have completed the work. Life is too short to work for clients who do not pay.

2. Get a personal guarantee. Some small businesses will attempt to leverage on their service providers and suppliers. Once the work is done, they condition payment on the success of their own venture. The supplier effectively becomes a passive investor with no upside. If the company does not have the funds to pay you right now and you want to do the work, have the person requesting the work personally guarantee payment. Also, do a credit check on that person to see if nonpayment is a habit.

3. Condition discounts on objective standards. If a client seeks a discount because they have a large volume of work or will be a loyal customer, consider basing any discount on some objective standards. For example, a company will start to receive a 10% discount on the bill once they have ordered 1,000 widgets or have $50,000 worth of work done. This way a discount is not provided to someone who may be exaggerating their work simply to negotiate better terms.

4. Take a lien. If you sell products to a company, talk to your business attorney about UCC filings so that you can reclaim the product if payment is not made. If you are a service provider, draft your contract so that you have a lien on any work which is not paid for. While the work may not be of much value to you once it is completed, the threat that you will repossess the work done for the client may give you a bargaining chip if the client does not pay.

Obtaining good clients takes time. Bad clients waste your time. If your clients don’t pay, you only have an expensive hobby.

This blog post is intended for informational purposes only, and should not be construed as legal advice or as pertaining to specific factual situations. Consult with an attorney concerning your own needs and circumstances and to obtain any legal advice with respect to the topics discussed in this post.