Published on November 10th, 2014 | by Pete0
Dealing With Clients and Late Payments – 7 Top Tips
As with most small businesses and companies, the bane of contractors and freelancers’ lives are clients who hold off payment till the last moment, or worse, end up getting later and later with their payments. Not only can this be incredibly stressful for the contractor involved but it can also lead to serious problems with their cash flow which can threaten their contracting business
Late Payment – A Serious Issue
Late payment tends to be an issue that most affects contractors working directly for clients. Though it does happen occasionally that agencies end up paying their workers late, it is a lot less common. There are probably two reasons for that, the first being that clients are less likely to muck an agency around (both because they are large businesses and because they will want to use their services again) and also that agencies have the resources to pay their contractors even if the client is proving unreliable. However, when the relationship is simply one between client and contractor, companies, particularly larger companies, have been known to hold off payment for as long as possible.
For years this was a real problem for small freelancers and contractors although in 1998 and then 2013 some remedy was taken to make this relationship a bit fairer. In 1998 The Late Payment of Commercial Debts (Interest) Act was passed in order to provide smaller firms with some legal protection against this happening by being able to charge their clients interest on any invoices that become overdue. On top of that, last year the EU Late Payment Directive (which came into force on 16th March 2013) permitted businesses / contractors to charge their clients not just interest, but also any reasonable costs for debt recovery.
However, as with all things in life it is rarely that easy. Most contractors will be extremely reluctant to start trying to charge interest to their bigger clients in case they damage the relationship and lose one of their largest sources of income. So what else can contractors do to make sure they prevent the situation getting to this point? Here are some suggestions:
(1) Ensure that your terms of payment are clearly stated on all of your paperwork, as well as on your invoices. This should include the actual term of payment (either 7 or 30 days are the usual terms) and make clear that you reserve the right to charge interest on any payments that are late. Whichever terms you prefer, the recent EU directive itself assumes that all contracts are subject to a standard 30 day payment period.
(2) If your invoice does become late, the most important thing you can do is get on top of it straight away and be proactive. This means a polite email first and then a telephone call to the client’s accounts department to give them a gentle reminder.
(3) If you do decide to charge them interest, then you are permitted to charge that interest at the reference rate of the Bank of England +8%. You cannot begin to charge this before 30 days is up.
(4) Ask potential clients to pay you via BACS transfer rather than a cheque. This is standard in agencies and there is no reason direct clients should not do the same.
(5) Think about offering better rates for companies who pay regularly and on time. If this is practical for you, it can be a good incentive to clients to pay promptly.
(6) Consider running credit checks on new (or potentially new) clients you are thinking about working for.
(7) Always keep calm and be proportionate when chasing up payments. Remember that there may be a genuine reason why payment hasn’t been made and also that losing your temper never helps the situation at all.
And finally, remember that if things get really bad you can always hire a debt management firm who can handle the issue on behalf of your business. The cost of this debt recovery, if reasonable, can also be included in the money that they owe you. The EU directive states that you can charge £40 debt recovery on debts up to £999.99 and £70 on debts between £1000 and £10,000.