Service-based businesses have some advantages over retail businesses in that they do not have inventory to manage or goods that can be stolen. That does not mean, however, that running a service-based business is without risk. If you provide a service for someone that does not pay for it, you are essentially in the same boat as a retail business that is stolen from. There are ways, however, to minimize a great deal of this risk. Here are 3 ways to find and reduce risk in your service based business.

Implement Secure Contracts

Most service-based businesses have customers and clients sign some type of contract before the service is performed. In some cases, however, these contracts are more pro forma than anything. The truth is, just the act of signing your name on a form creates a formal agreement that most people won’t sign unless they genuinely believe in their ability to uphold their part of the agreement. There are always a few people, however, that view contracts as more of an “if I can” than an actual obligation. Those people are the ones most likely to rack up thousands or even tens of thousands of dollars in services before you discover they actually have no intention of paying. At that point in time, your contract will need to stand up in court, so make sure it is a good, strong, comprehensive one.

Make Sure Payment Terms Are Clear

While the majority of people who sign a contract plan on paying you, that doesn’t mean they will pay you quickly. The main difference between service-based businesses and retail businesses is that retail customers pay before they receive the product, while service businesses generally have to perform the service before they are paid. In most cases, they can’t simply “undo” the service if the client does not pay. For that reason, it is always a good idea to get at least a portion of the cost of services up front. The more costly the services, the bigger the down payment you will want to require.

Hire a Management Company

Any time that a service business is not performing services they are not making money. So any tasks that take time away from offering the business’ primary service actually costs the business money. Some businesses may have built up a solid base of clients that simply pay their bills on time without causing the business any headaches, hassles or frustrations. The more problem clients a business has, however, the more it eats into their profits, because they are spending time tracking down payments rather than performing their service or generating more business. An accounts receivable management company can be an invaluable asset to any type of service-oriented business because they will track and manage payments for you so you don’t have to.

Service-based businesses are always the most vulnerable in the gap between when a service has been performed and when it has been paid for. Some businesses that offer a quick service that costs a few hundred dollars or less may be able to demand payment at the time services are performed. Most other service-based businesses, however, generally have to wait to be paid. You can seriously minimize your risk by taking a few critical steps up front and hiring someone else to manage payments on the back end.