One of the biggest causes of stress for limited company contractors and other small business owners is dealing with late-paying clients.
In fact, one of the biggest causes of business failures in the UK is poor credit management, which results in unsustainable cash flow problems.
Late payment legislation offers some protection
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 protects small businesses by allowing them to charge interest on overdue invoices.
The EU Late Payment Directive, which took effect on 16 March 2013, further strengthened this. This directive allows businesses to charge overdue clients for any ‘reasonable’ debt recovery costs in addition to 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 payment terms on your invoices
Print your payment terms on all your invoices and other paperwork. This includes:
The payment period stated in your contract (typically 7 to 30 days)
Your limited company bank details.
Your right to charge interest on late payments (see above).
UK law assumes a 30-day payment period if no payment terms are agreed upon – this could be the case if you contract direct with a client, but is unlikely if you contract via a recruitment agency.
2. You have a right to charge interest on overdue invoices
Under the late payment legislation we outlined above, you are entitled to charge interest at the Bank of England reference rate (currently 5%) + 8% on overdue payments. Under UK law, payment is considered late if it is overdue by 30 calendar days, unless you and your agent or client have agreed otherwise.
3. Do you know who to contact in the accounts department?
When you start a new contract, make sure you have a contact in the agency or end client accounts department. Many contractor learn this the hard way!
4. Be proactive if a payment is late
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 if needs be. If you use accounting software such as FreeAgent, you can check on the status of any outstanding invoices, and send reminders automatically.
5. Make sure you’re paid via a ‘modern’ method
Your contract should specify how often you will be paid. It may also specify how you’ll be paid. Faster Payments is easily the fastest method (within hours), although many companies still pay via BACS – which can take a few days. Any outdated methods (e.g. cheques) are very rarely used.
6. Can you offer an incentive for prompt payment? (unusual, but effective)
Some businesses offer more favourable rates for prompt payment; consider this option if it is practical. This is more likely to benefit freelancers, as most contractors can only charge a pre-agreed rate.
7. Credit check recruiters and direct clients
If you’re working directly with a client, especially for the first time, consider running a credit check to assess their credit worthiness. Look them up on Companies House too to see past accounts and to make sure they’re not late in submitting official paperwork. This is particularly important when dealing with small agencies or businesses you haven’t worked with before.
8. Be calm and proportionate when chasing late payers
Although late payment can be stressful, try to be proportionate when complaining about an unpaid invoice. There may be a good reason why payment has not been made.
From our experience, late payments are usually sorted out fairly quickly, and are usually caused by one-off errors. Make sure your invoice and bank details are correct and your invoice was received at the other end before assuming anything else has happened.
9. Outsource the problem to a debt collection agency
In extreme cases, consider using a debt recovery agency. You can easily find dozens of companies who will be happy to do this for a one-off fee, or a percentage of the outstanding debt. The older the debt, the more commission you’re likely to pay. We’ve recommended Safe Collections for over a decade. Mention ContractEye and you might get a discount (we don’t get paid for saying this!).
10. Compensation for debt recovery costs
Although this should be a last resort, it’s good to know that you can charge clients for reasonable debt recovery costs under UK law. This has been the case since March 16th, 2013, and remains valid post-Brexit.
In addition to interest on late payments, UK law entitles you to charge for debt recovery:
£40 on debts up to £999.99.
£70 on debts from £1,000 to £9,999.99.
£100 on debts over £10,000.
These amounts were introduced by the EU Late Payment Directive and have remained in place in the UK. Many European countries apply a similar fixed fee, starting at €40.
