Ways To Identify & Avoid Potentially Problematic Customers

This article on Problematic Customers originally appeared in the July 2026 issue of THE SHOP.

By Mark E. Battersby

It doesn’t take too many nonpaying customers to create an expensive problem. In fact, far too often today, a specialty automotive aftermarket professional must be concerned not only with his or her own operation’s financial well-being, but also the financial situations of customers.

There are always customers that seemingly disappear without warning—and without paying their bills. In these cases, it is often too late to collect anything.

However, if the owner or manager of a performance, restyling or automotive customization business is vigilant about the financial status of everyone they work with at the beginning of a project, dealing with troubled customers—before the dreaded final step of “firing” those customers—can be less impactful.

RECOGNIZING TROUBLED CUSTOMERS

It’s far easier to take a proactive approach by avoiding the types of customers/clients that usually spell trouble. Staying alert to signs that longtime customers may be having financial problems and, most importantly, taking quick action when their payments are slowing down, is a viable strategy.

Although a credit check is important, it’s not a failsafe. Because things can go south quickly, minimizing exposure to a customer or potential customer’s credit troubles requires every specialty automotive aftermarket professional to exercise due diligence. In other words, minimizing their operation’s exposure to the credit troubles of others in the beginning of the relationship—and then at every step afterwards—is vital.

FINDERS KEEPERS

Remember the old saw about possession being 9/10ths of the law? No restyled or customized vehicle should be returned without full payment.

In most jurisdictions, a so-called “mechanic’s lien” allows a shop to protect itself against non-paying customers by allowing the shop to retain the vehicle until full payment is received.

A specialty automotive aftermarket shop can often sell a vehicle that is not picked up within 30 days after the work has been completed. The sale price should cover costs, including labor and parts.

Avoiding this potential problem means verifying the identity of every customer, making a copy of their driver’s license and the vehicle’s registration. Requiring a deposit is also important, with some shops requiring a 50% payment to cover parts and, perhaps, some labor.

Of course, obtaining a signed order detailing all services to be performed, the cost of parts and labor rates should be a standard practice. A signed repair order is considered essential documentation if the matter eventually ends up in small claims court.

AND THEN THERE’S INSURANCE

Insurance won’t help with slow or non-existent payments, but it may reduce the cost of excuses frequently used by nonpaying customers. Insurance coverage such as Errors and Omissions policies covers lawsuits that might result from professional errors.

The more common Garage Keeper’s insurance covers physical damage to a customer’s vehicle while it is in the shop. It usually protects against “perils” such as fire, theft, vandalism and collision.

General liability insurance protects against customer claims of faulty work or repairs. If someone else’s property is damaged and the shop is found to be liable, the cost of replacement or repairs is covered by liability insurance.

In fact, should someone’s—a competitor, customer or supplier’s—reputation be damaged by something said by the shop’s owner or its employee, the associated costs could be covered.

FIGHTING THE GOOD FIGHT

Most business owners and managers are aware that contracts and payment terms should always be put in writing. Unfortunately, this alone may not protect the business if a customer runs into financial problems. Few troubled customers are likely to begin paying simply because there is a contract.

Depending on one or two customers as the main source of income can put any performance, restyling or customization business at risk, should payments from one of them slow down or dry up. Even a business whose plate is full might be well advised to continually look for new customers.

Make sure there’s a constant inflow of customers so, if one fails and isn’t able to pay on time, potential problems are avoided. It also provides more time—and a financial cushion—to work things out with a troubled customer.

BUSINESS JOYS

Unfortunately, wringing money out of deadbeat customers has become a common issue in today’s slow-growing economy. In some cases, the only option may be hiring a collection agency or going to court to collect—but many small business owners don’t like these routes.

Despite the general rule of not releasing a vehicle before payment in full is in hand, there are occasions when an exception might be in order. In some cases, those unpaid amounts can be written off as a bad debt deduction.

When all else fails and further collection efforts are fruitless, Uncle Sam, in the form of our tax laws, may provide a solution: the bad debt deduction.

Under tax rules, a business’s bad debt is defined as an account or note receivable that proves to be entirely or partially uncollectable despite collection efforts. Bad debts are written off as soon as they are determined, because the shop doesn’t expect future economic benefits and it no longer remains an asset.

Of course, just because something may be labeled as “business bad debt” doesn’t necessarily make it tax deductible. A bad debt deduction can only be claimed if the amount owed was included in the operation’s gross income.

This is almost never the case for cash method businesses (that means most of us who report income when we receive it). Accrual method businesses, however, report income as it’s earned; if receivables have already been claimed as income, a bad debt deduction for uncollectible receivables is appropriate.

When a customer fails to pay his or her debts, the specialty automotive aftermarket shop (creditor) has several remedies available to help collect the funds due. In addition to the common collection strategies such as dunning notices, collection agencies and even small claim courts, bankruptcy all-too-often rears its ugly head.

DREADED BANKRUPTCY

Worse-case scenario, a troubled customer appears to be on the brink of declaring bankruptcy. Bankruptcy will, of course, impact the shop’s collection efforts and may even require repayments of already collected funds.

Possession of the funds collected may not be forever, but when trying to avoid paybacks it does give a performance, restyling or customizing business negotiating leverage in a lawsuit or bankruptcy case.

Of course, if a shop owner or manager is aware of a customer’s bankruptcy, even informally, they must act to preserve their operation’s rights. Fortunately, creditors do have rights, too.

Naturally, when a notice of the bankruptcy is received, proof of a claim should be promptly filed with the court. Also keep in mind that deadlines and other rules are strictly enforced in bankruptcy cases, which might make legal guidance necessary.

Under bankruptcy laws, creditors usually have the right to be heard in court regarding a payment plan, liquidation of the debtor’s non-exempt assets and payments from the assets of the debtor’s “estate.”

Creditors usually have the right to be heard in court regarding a payment plan, liquidation of the debtor’s non-exempt assets and payments from the assets of the debtor’s estate.

In other words, creditors can voice their opinions about debts that might or might not be forgiven. They can also argue about assets that, perhaps, should have been included in the bankruptcy estate but weren’t.

When it comes to dealing with a customer or supplier after discovering they are bankrupt, all collection efforts should cease. This automatic stay is designed to protect the debtor and his property from all forms of collection during the bankruptcy process.

Whether the aftermarket shop is a secured or unsecured creditor, the best deterrent to abuse of the bankruptcy system is creditor vigilance. Some bankruptcies are dismissed because of the debtor’s failure to comply with the requirements of the bankruptcy law. When that happens, creditors are free to pursue collection according to state law.

SLASHING UNPROFITABLE CUSTOMERS

Often ignored by many business owners or managers is whether the best business decision may actually involve “firing” some of their worst customers. While this may seem like an illogical suggestion (particularly in a tough economy), having the wrong customers can cost shops in unexpected ways and hold them back from real success with the temptation of short-term profits.

Worried about the customer going elsewhere? Sometimes that’s a good thing. Troubled or problem customers become problems for competitors, too.

AVOIDING TROUBLE

Staying alert for signs that customers’ financial situations are changing can protect any business. If, for example, a customer ignores or doesn’t return phone calls, it may mean nothing. However, if three or four calls have been ignored and the last payment was late, it could mean the customer can’t afford the work—but hasn’t gotten around to telling you.

Minimizing a shop’s financial risks and bad debts  can be achieved by using various strategies ranging from initial credit checks to well-thought out collection steps and parting-ways with troubled customers. In the end, there is always the tax deduction for business bad debts.

Mark E. Battersby writes on financial and tax-related topics. Learn more at thetaxscribe.com.