75% of UK small owner-managed businesses have suffered late payments this year according to research by Worldpay.
Their research also showed that late payments are becoming more of a problem with year on year with 45% of respondents saying they had experienced cash-flow problems as a result.
Are late payments just part and parcel of contracting or consulting or is there a way of minimising late payments and managing their impact when they occur?
Managing client relationships to minimise late payments
For many contractors and consultants, the issue of late payments means much more than just issues with cash flow; there is the fear that it will damage relationships with the client therefore impacting on future opportunities. Chasing late payments can be an uncomfortable experience so ensuring you do all you can to minimise occurrence can save a lot of time and effort. Making payment as easy as possible for the client is the best way to ensure you are paid on time.
By understanding your clients’ processes and tailoring your invoicing to each client, you maximise adherence to your payment terms. Our section on invoicing provides a full guide on how and when to invoice clients to maximise timely payments. Minimising the instances of late payments is the most efficient way of managing your cash flow but having a robust procedure for managing late payments will ensure that you handle instances efficiently, professionally and protect client relationships.
Managing late payments effectively
Proactivity is a contractor or consultant’s biggest asset when it comes to managing client payments. End to end management of payments minimises the disruption of late payments; you can identify hot spots (where late payments occur) then work towards removing them. New clients can take time to bed in and the first few invoices can pose the greatest risk in terms of payment problems. By remaining proactive throughout the payment process, you can approach payment issues early and resolve them faster with minimal effort. Here are our top tips for managing potential problems:
- Make sure a late payment clause forms part of your payment terms and is reiterated on every invoice as standard – by outlining late payment terms on the invoice the client is reminded of the penalties they could incur and can smooth the way should late payments require remedial action. You can see more on late payment penalties in the section below.
- Take control of new accounts and large payments – when billing a client for the first time, or if there is a large payment due, be proactive in ensuring the payment is made on time. It is prudent to call and check that: the invoice has been received, all the supporting information (if required) is present and that the payment is being processed in line with the payment terms. By calling ahead of the payment deadline, you can rectify any issues that could delay payment.
- Be vigilant – track debtors and outstanding invoices. Depending on the relationship, call or email clients on the day that payments are due if no payment has been received. For the majority of clients a short reminder of the outstanding amount is due (plus a copy of the invoice) is all that is needed to secure a payment within a few days. By including a late payment clause in the invoice wording, you won’t need to spell out the consequences for the majority of clients. Swift reminders show your client that you manage late payments whilst enabling you to retain the business relationship.
- Be firm and fair – by chasing late payments as soon as they become overdue it allows you to retain control and provide the opportunity for payment without penalty. If the client is keen to rectify the payment problems, this strengthens your relationship and should expedite future payments. Use your judgement on whether to invoke the late payment clause – using penalties is an effective way of managing persistent late payers, but mistakes can happen and leniency can go a long way to securing more work and earlier payment in the future.
- Follow government guidelines to the letter for debt recovery – by following the late payment directive guidelines you not only maximise your chances of recovering the debt, but should you need to take the client to court you are more likely to have the dispute ruled in your favour without incurring court costs. After chasing the payment and trying to rectify the situation, then you can charge the allowed late payment interest and recovery fee; this prompts the majority of problem payers to settle their debts. If this measure fails, you can appoint a debt recovery agency to retrieve the debt before escalating the issue to court proceedings.
The majority of late payment issues can be resolved with proactive management and a firm reminder. The late payment penalties below should be used to form part of your payment terms and used sparingly when the need arises.
Legal proceedings for securing payment of unpaid debts
Some late payments cannot be resolved through informal discussions and reminders sent to the client. When you are contemplating legal action, it is usually a signal that the relationship with the client has broken down and it is unlikely that you will work for them again. It is worth noting that utilising a specialist debt collection agency or legal representative are both effective routes for large sums of money.
To begin court proceedings you can use Money Claim Online, a government service designed to administer small claims court proceedings. Court fees can run into hundreds of pounds, but if the judgement is in your favour and you have made every reasonable attempt to settle the dispute out of court, the fees can be claimed from the debtor. The service can also arrange payment collection on your behalf.
Money Claim Online provides all the guidance and protocols for initiating a court claim, calculating the relevant interest on the late payment plus supporting mediation and collection services that can help you secure payment. Visit www.moneyclaim.gov.uk for more information.
Late commercial payments: charging interest and debt recovery fees
Late payment legislation was introduced to encourage a culture of prompt payment. The 2013 amendment to this legislation makes pursuing late payments across the European Union simpler and more consistent. Under the legislation debtors can be forced to pay interest and reimburse reasonable recovery costs of the creditor if they do not pay for goods or services on time.
The interest you can charge your commercial clients for late payments is ‘statutory interest’ and is set by late payment legislation. This is 8% plus the Bank of England Base rate for business to business transactions.
Late payment interest calculation
Debt x Interest rate x (the number of days late/365) = simple interest that can be charged
Compensation for recovery costs
You can also charge a fixed amount for recovery costs, which is dependent on the amount of the unpaid debt. This ranges from £40 for debts under £1,000, to £100 for debts over £10,000.