IT Contractor Mortgages and Pensions

One of the biggest causes of stress for contractors, and other small business owners, is dealing with late paying clients.

In fact, one of the biggest cause of business failures in the UK is poor credit management resulting in unsustainable cash flow problems.

How serious is the problem?

Although a fairly recent Experian late payment report (for Q3 2012) shows a marked improvement in the amount of time firms pay their bills beyond the agreed date compared to Q3 2011, it still takes an average 24.88 days for business invoices to be settled after agreed terms.

Although most contractors work via agencies and rarely suffer from late payment problems, contractors and freelancers who work for clients directly may face problems getting paid on time. Agencies too have been known to pay late.

The Late Payment of Commercial Debts (Interest) Act 1998 was devised to offer some form of protection for smaller firms, initially providing all businesses the right to charge interest on overdue invoices.

Significantly, the new EU Late Payment Directive, which took effect from 16th March 2013, allows businesses to charge overdue clients for any 'reasonable' debt recovery costs, as well as interest on the outstanding debt.

In reality, many contractors are understandably reluctant to charge interest to larger clients, as they may not want to risk losing a potential source of income.

With this in mind, here are some proactive steps you can take to maximise the chances of getting your invoices paid on time.

Tips for preventing late payment

1. Print your payment terms on all your invoices, and other paperwork. This includes the payment term (7 days, or 30 days are typical terms), your bank details, and your right to charge interest on late payments. Unless otherwise specified, the new EU Directive assumes a standard 30 day payment period applies to all contracts.

2. You are entitled to charge interest at the Bank of England 'reference rate' (linked to the base rate - which is currently 0.5%) + 8% on overdue payments. Unless specified otherwise, the law will consider 30 calendar days to be the deadline before interest can be charged.

3. Make sure you are provided with a contact in the agency or end client accounts department when you start a new contract or are engaged to provide freelance services.

4. If your invoice is not paid on time, you must be proactive. Follow up the accounts department with a polite phone call or email reminder, before becoming more forceful with your request for timely payment.

5. Encourage clients to pay you electronically via BACS rather than via cheque (for direct clients). Almost all agencies pay their contractors direct these days.

6. Some businesses offer more favourable rates for prompt payment; consider this option if it is practical to do so. This is more likely to benefit freelancers, as most contractors can only charge a pre-agreed rate for their services.

7. Run a credit check on potential clients if you are not working via a recruitment agency. If you are using a small agency you are unfamiliar with, credit check them as well.

8. Although late payment can be stressful, try to be proportionate when complaining about an unpaid invoices. There may be a good reason why payment has not been made.

9. In extreme cases, you may decide to employ the services of a 'debt management' company who will extract payment on your behalf. As mentioned earlier in this article, from March 16th 2013, you can now charge reasonable recovery costs from your client, if you decide to go down this route.

10. You are entitled to bill late paying clients for debt recovery costs too. £40 on debts up to £999.99, £70 from £1,000 to £9,999.99, and £100 for sums of £10,000 or more. These amounts remain unchanged following the implementation of the EU Directive. The standard late payment fee charged elsewhere in the EU starts at €40.

Further Resources

Pay On Time - complete guide to the Late Payment of Commercial Debts (interest) Act 1998

Department of BIS - user's guide to the late payment legislation

Debt Recovery Service

You can also take advantage of our recommended debt recovery service, including preferential rates for Contract Eye visitors.