It’s vital for a business to maintain a healthy cash flow as you want your business to stay on track financially and this is no different if you are working as a contractor. Because of this, you expect all of your invoices to be paid on time. Ultimately, in reality, this is never as easy as it should be. The majority of your customers will pay on time and no issues are raised, however, there will always be clients you have to chase, and will pay you after the deadline. They may have their reasons but as a contractor, it is vital for you to get paid on time so you can stay afloat.
“Late payment is the silent killer of small business”
According to research conducted by MarketInvoice, a whopping 62% of invoices issued by UK SME’s (Small to medium-sized enterprises) were paid late in 2017 (worth £21bn) which was up from 60% in 2016. The average late payment was £51,826 which put the UK at the top of the late paying of SME’s.
Chasing after an unpaid invoice can be a nightmare and is something every contractor wants to avoid. Dealing with this issue requires delicate handling as some routes are more forceful than others. By finding the right strategy in chasing up payments you can alleviate any possible stress.
3 Wise Bears has compiled a list of the best ways of chasing up those invoices to help you in sourcing that all important payment.
1. Draw up your terms and conditions
When you enter a work relationship with a client, a contract will be drawn up with a list of expectations that both sides are obliged to fulfill. This needs to be paired with a list of your terms and conditions for working with you. These terms should include:
- A notice period for leaving the contract
- Service level agreements and Key performance indicators
- Explain when and how you will invoice
- Limits on the amount of changes to the work
- What your expected period of payment is
- Details of late fees, early payment discounts or part payment rules
The late payment fees you can charge need to be in accordance with the Late Payment of Commercial Debts Regulations 2002 – you are allowed to charge £40, £70, £100 depending on the size of the contract (less than £1,000, £10,000 and above £10,000 respectively).
Offering an early payment discount will act as an incentive for your clients to pay on time. You can offer a 4-5% discount which can be taken from future invoices as credit or removed from the bill altogether. Alongside encouraging your client to pay punctually, it can also help build a longstanding relationship.
Part payment will depend on the project. Some work you complete might require early payment. This is particularly common with graphic and website designers but creative freelancers and copywriters are also starting to do this.
2. Create a list of clients who are due to owe you money
It is up to you as a business to keep on top of those who have not paid their outstanding invoice, or have deadlines to pay one coming up. Failure to manage your client’s payments will see your cash flow disappear very quickly. Keeping a list of those clients who are within the period of payment will give you a document that you can check regularly. By monitoring this, you can spot those who pay on time and those who consistently miss the deadline, giving you the chance to reconsider your process
If the deadline has passed, make the call to the client. Ask when they plan to pay. If you’re using an online accounting system, you can generate reminder emails that can be sent at regular intervals. Do not let that payment get away from you!
3. Invoice the same date each month
Just as employees are paid on the same date every month, set up a specific date each month for when you expect payment. This way there can be no doubt on both sides when payment is due. It also allows for you to know when your cash flow will get its regular injection, therefore helping you allocate your budget where it needs to go.
4. Hold back work until payment is made
You require money to work and you have every right to be paid for your labour. If a client hasn’t paid 30 days after the deadline, stop all work. Inform the client that you will not resume until payment has been received. The threat of tools being downed can be enough to motivate clients to sort the payment out.
5. Inform a lawyer if payment is still late
The next step from holding back work is the legal route. Informing a lawyer of the unpaid invoice can lead to them to sending a letter. The threat of legal action will encourage clients to process the payment.
6. Consider a payment scheme for struggling clients
Knowing which clients you can trust to pay the full amount over time comes down to instinct. If you believe they can make the payment, consider setting up a payment scheme. The client can then pay the owed invoice(s) over a longer period of time, with added interest. The interest added must be made clear to the client. The thought of paying interest could dissuade the client from getting to this stage.
7. Use small claims court as a last resort
A small claims court is the final resort when it comes to overdue invoices – by this point, you will have accepted that any meaningful relationship has broken down. If they are still refusing to pay then you must refer the case to a small claims court who, if successful, will create a writ for payment from the client.
If you’re considering becoming a self-employed contractor or are already self-employed and would like some accounting advice, you can contact the specialist contractor accountants, 3 Wise Bears who can help you out.