Money. Not only does it make the world go round it’s essential for keeping the wheels of your business turning too. So when clients don't pay on time, it can cause problems.
With that in mind, we asked our friends at Sparqa Legal to put together a short guide to making sure your invoices are paid when they should be. Over to you, Sparqa…
The Small Business Commissioner estimates that a third of all payments owed to small businesses are late and that 20% of small businesses have faced cash flow problems when clients don’t pay on time.
Coupled with the hours and resources required to chase payments and the negative impact it can have on your credit rating, unpaid invoices can at best create a cash flow bottleneck; at worst, they can leave your business insolvent and forced to fold.
So, what can you do about it?
Here are our top tips for what to do when clients don’t pay on time and how to make sure that in the future, they do.
Strategies for when clients don't pay on time:
Establish well-oiled payment procedures
Start as you mean to go on. Send invoices promptly and chase them when they’re due. This will help you to keep track of payments as your business grows and to ensure that nothing falls through the net.
As a starting point:
- Create an invoice template that’s easy to understand, clearly states the payment due date and includes your bank details and any other acceptable method of payment. This can help to avoid queries from your customers that delay payment. You might want to take a look at these VAT and Non-VAT invoice templates.
- Make use of a cash management system that will keep track of what you’re owed, prompt you to send invoices and remind you when payment is due. There are several different software solutions that can help.
- Think about when it might be appropriate for you to change your payment terms (eg because a customer or job is higher risk for your business). For instance, sometimes it might be appropriate for you to price a job on a retainer basis or ask your client for an upfront payment.
Do your homework before taking on a new client
It’s exciting to win a new client or customer, but before you get carried away, do some due diligence.
Make sure you know who you’re contracting with and what the potential risks are:
- If your new client is a company, check out its Companies House register entry to see when it was incorporated, who’s involved and what its annual accounts look like. If it’s got few (or no!) assets, you could take extra precautions, like asking for guarantees or buying a credit report from a credit reference agency.
- Think about getting a credit report if you’re contracting with an individual or find out if they’ve had insolvency issues before by searching for them in the Gazette.
- If your client is a large business, check its payment record by looking for its payment practices report on the government’s website. If it’s a small business, see if they’ve signed up to the Prompt Payment Code (a voluntary code committing them to paying within 60 days).
- Read the contract. Make sure you and your customer know exactly what the payment terms are and when invoices will be due. This can help to avoid any misunderstanding later.
- Look out for warning signs that might indicate your client is struggling (eg if they begin to pay you later and later).
Know your bottom line and when to escalate
Decide how flexible you’re willing (and able) to be when clients don’t pay on time. Plan a timescale for escalating your debt recovery actions or writing off a debt.
Whatever your bottom line, once a payment is late, get in contact with your customer to find out why. Wherever you can, follow up any conversations in writing (eg by email) so that you’ve got a written record.
If this doesn’t bear any fruit, you could consider any (or all) of the following steps:
- Send chasing letters on an escalating scale, for example over a month-long period, following this suggested debt collection timeline.
- Find out whether you can charge interest; you’ll be able to either if your customer is another business or if your contract says that you can. Tell your customer in advance (in your chasing letters) that you plan on adding interest if payment’s not forthcoming.
- Escalate your debt recovery. There are several cost-effective steps that you can take to try and prompt payment. These include instructing a debt collector or sending a statutory demand (a formal, written demand for payment).
- Go to court to get paid.
One size doesn't fit all
What’s most appropriate for your business will depend on a number of factors, including the value of the debt, the importance of the client relationship and the resources that you have – chasing debts can be time-consuming and expensive.
If you’re worried about the costs associated with chasing unpaid invoices, one thing to consider is insurance. Adding a legal expenses policy to your cover can help with the legal costs involved in dealing with outstanding invoices.
Whatever your strategy for when clients don’t pay on time, a bit of extra help is never a bad thing. These guides to payment systems and procedures, charging interest on late payments, debt recovery, and court proceedings drill down into the detail. You may find these customisable templates and step-by-step guides useful too.
The content in this article is up to date as at the date of publishing. The information provided is intended only for information purposes and is not for the purpose of providing legal advice.
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