Poor cash flow management has always been the number one reason why businesses of all size fail. Like other business owners, contractors can also suffer significant financial difficulties if a client fails to pay on time.
Fortunately, there are a number of tried and tested actions you can take to minimise the chances of suffering late payment problems.
If you are contracting via a recruitment agency, you are less likely to suffer late payment issues than if you are contracting direct for a client, simply because agencies have dedicated accounts teams who process payments on a continual basis. Agencies collect the gross weekly or monthly payment from the client, and the contractor invoices the agency (either via a limited or umbrella company structure).
If you are working directly for a client, payment terms for other business providers are likely to be 30 days or more, so if the client has not worked with contractors before, you will need to set out your payment terms clearly before the contract commences.
Here are some tips, based on our own experiences of running businesses over the past 15 years, to help contractors keep on top of late payment issues.
Top tips for dealing with late payment problems
- Before you enter into a contract, ensure that payment terms are agreed upfront. These will typically be pre-stated if you are working via a recruitment agency, but you may have to negotiate terms if working direct. Many direct contracts opt for 7 or 14 day payment terms. If not otherwise stated, it is assumed that standard 30 day payment terms apply to all transactions.
- If you are carrying out a specific project with a fixed price, you may consider asking for the client to provide an initial deposit – 25% for example.
- Consider providing more favourable terms for clients who pay promptly (this will apply if you’re contracting direct, not via an agency, as terms are fixed).
- Make sure you have the correct contact details (name, email address, phone number) of the accounts department. These are the details of the person / email address to send invoices to, and an accounts person to contact in case there are any issues with payments.
- Make it simple for your client / agency to pay you. Ensure your bank details are correctly printed on all invoices.
- Make sure you submit correctly formatted invoice. The majority of limited company contractors are VAT registered, and must include certain types of information to make an invoice legitimate. This includes: a unique, sequential invoice number, your company and the client’s company details, any relevant reference numbers (PO / VAT Registration No.), a description of the services being provided, the net, gross and VAT amounts.
- Consider investing in online accounts software. Products like FreeAgent keep track of all your accounts and tax deadlines, and you will be able to see the payment status of all your outstanding invoices – enabling you to chase late payers more efficiently.
- All firms have the right to charge interest on late payments, under the terms of the Late Payment of Commercial Debts (Interest) Act 1998, and the more recent EU Late Payment Directive (2013). You can charge interest at the rate of 8% above the prevailing Bank Rate (0.5% in May 2016). You are also allowed to charge for reasonable ‘debt recovery costs’ as well as interest on any outstanding invoices. Many contractors and other small firms are understandably reluctant to charge interest in case they upset their clients, however it is your legal right to do so.
- If your agency or client fails to pay an invoice on time, you must be proactive. However, rather than being ‘forceful’ in the first instance, there may be an innocent reason for non-payment; the invoice may have gone astray, or there may have been some other kind of error. Send a reminder email to start with, and then follow up with a call to the accounts department. If you are working via a recruitment agency, many contractors (ourselves included) will have encountered teething problems with payments – especially at the start of a new contract, but the vast majority can be straightened out with ease within a few days.
- If you have experienced a persistent late payer, and have made a significant effort to chase the late payment, you might consider using a debt recovery firm to ‘encourage’ the client to pay. In the worst-case scenario, where everything else has failed, you can also pursue late payments using a solicitor, and ultimately the courts.
Keeping on top of your cashflow is an essential task for all contractors. Get hold of some software (online or offline) to track the status of your invoices, and don’t bury your head in the sand if a client has not paid on time. Be proactive and organised to ensure that a minor late payment problem doesn’t snowball into a cashflow crisis.
If you’ve tried your best, and your client or agency still won’t pay, you might be interested in trying our partners at Safe Collections, who have a wealth of experience – we’ve used them ourselves.
Protect your contract income if you can't work - pay via your limited company