Tackling Late Payments As A Small Business Or Freelancer

39% of invoices issued by small businesses in 2019 were paid late. And it’s been reported that in 2019 small businesses were spending, on average, more than one working week per year chasing late payments. Keeping your business’ finances in the green can be tricky enough without these extra hurdles. So in this blog we’ll be looking at ways you can tackle these late payments and tricky clients.

 

The late payment situation is worse than it’s ever been for SMEs. In November 2019 the estimated cost of late payments to our country’s SMEs was reported to be £23.4 billion – that’s an average of £25,000!

If you’ve found your small business has been hit by late payment problems and all that goes hand in hand with that, including the stress, then some of these tips might help you chase up those invoices in 2020.

To begin with, let’s cover the easy options.

 

Call, Don’t Email

Some small businesses are guilty of not picking up the phone enough – and who can blame them, they’re busy! But sometimes picking up the phone and getting the right person on the other end can resolve the situation fairly pain-free.

It could be that the invoice is lost somewhere: an employee is on holiday or has left the company, leaving your invoice in their inbox. It could be that the invoice is waiting on sign-off from someone who isn’t available. Or it could be that a printed invoice has simply gone missing and they need you to send a new one. 

Avoid the inbox and speak with a real human, you’ll be surprised at how much you could get done in one 5 min call.

 

Trouble-Shoot

If it’s a recurring problem, like your client is late every month, then discuss this with them to see if there’s a better way to work together. It may be that they have particular days they run payments and your invoice is routinely missing these runs by a day or even half a day. 

It could be that the person you agreed payment terms with and the finance department have a difference of opinions on payment terms and you may need to agree a new term – it may be later than you’d like but at least you can get a reliable timeframe in your forecast.

Maybe it’s something as simple as your client not being as tech savvy and your fancy digitally delivered invoice is simply beyond them, in which case it’s back to the good old post for those invoices. Or vice versa – maybe you’re sending physical invoices in the post every month and your client would prefer digital copies.

 

Offer A Variety Of Payment Methods

Sure you might prefer BACS, but payment is payment. If your payments are late because they’d rather pay by cheque, then take the cheque. E-payments are becoming increasingly popular because they’re so easy, and if your business has the capacity to do so you can even offer PayPal or similar as a valid method of payment.

To do this you may need to upgrade your accounting software to something like QuickBooks – we support a variety of digital accounting solutions which are all MTD compliant – and if that’s something you’re not worried about right now you may need to be MTD compliant in the near future anyway.

 

What’s In Your Contract?

If for any reason you haven’t got a legal contract in-place for the work you’re doing – get that in-place ASAP. Before you do any work you must have this signed and sealed to ensure you have a legal leg to stand on. 

If you appoint a legal firm to help with your business they should be able to provide you with something appropriate. If you don’t, however, do not fear – there are plenty of free to use or reasonably priced contracts online. The LawDepot have a good selection for free – you’ll need to credit them in your contract, but other than that it’s fairly straight forward.

If you already have contracts in-place with the companies you’re struggling to get payments from, then it’s time to review them. If you don’t have a clause in there about late payment penalties, you need to update your contracts. You can include a % of the total owing which becomes chargeable if the contract is late. This will help you recoup costs associated with chasing them for payment.

While many businesses choose not to enforce this, except in extreme circumstances – because they want to maintain a positive working relationship – simply being able to point this out can sometimes pressure a client/customer enough to get that payment through.

 

You’re Entitled To Charge Interest

If you don’t have the % charge for late payment detailed in your contract you can still legally charge interest on a late payment. Read about your business rights here on the Gov website.

You can charge something called ‘statutory interest’ which is 8% + the Bank of England’s base rate for b2b transactions. Here’s an example calculation taken from the Government’s website:

If your business were owed £1,000 and the Bank of England base rate were 0.5%:

• the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
• divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
• after 50 days this would be £11.50 (50 x 0.23 = 11.50)

You can also claim debt recovery costs on late payments: 

• < £999.99 = £40
• £1,000.00-£9,999.99 = £70
• >£10,000 = £100

 

Consult the Credit Protection Association (CPA)

The CPA offer a free advice and a great range of services if all else fails. It may seem drastic to take legal action but for small businesses late payment can be dangerous, and may even lead to your company having to close down. 

Remember, this is happening to far too many small businesses in the UK, yours is not an isolated incident sadly. And while that’s a problem there is strength in numbers. Be honest with your client/customer, try to resolve the issue amicably first and if that doesn’t work move on to interest charges and legal advice.