A Contractor’s Guide to Dealing with Late Payments
Whether you’re working directly with a client, through an agency or through your limited company, you are likely to have experienced late payments. This issue can cause cash flow problems, which can then lead to a failing business, given that contractors can suffer from financial difficulties when they don’t receive payment on time; it can also lead to a deterioration of the relationship with the client or agency. Minimising the possibility of being paid late – or never – is vital.
So, how can you stay on top of your payments (or payment issues) at all times?
Impact of Late Payments
We understand that talking about money can be a sensitive topic, so discussing terms or late payments can be a challenge for a lot of contractors. However, it’s vital that you are able to surpass this obstacle, since you have a right to be paid on time for your services.
You’ll also want to be aware of the effects that late payments can have on your business. While you may believe that having some slow-paying clients can be a fairly trivial problem, the truth is that they are more than a mere inconvenience. Late payments can have serious consequences, be it for your cashflow or for the relationship you have with your clients – money issues could put you at risk of closure as well. If you’re having cash flow troubles, then it will also be difficult to maintain your equipment or tools, for example, which can make your job harder or impact your business negatively.
If you’re contracting via an agency, it’s likely you’ll run into fewer late payment issues than when you are contracting directly for a client. This is because recruitment agencies tend to have a process in place (as well as dedicated accountancy) that can sort the issue out.
Add Late Payment Fees
Making late payment fees part of your contract terms can help you to secure payment for your work. Stating this term at the beginning of the project – and getting it in writing – is a great incentive for clients to pay your wages in a timely manner. You can add a percentage of penalty if the client fails to pay in a specified period of time; for example, if you don’t receive payment within 30 calendar days, you are entitled to interest.
You’re not getting paid on time if your client has neglected to send you payment after the date agreed on your contract or invoice. You are entitled to claim statutory interest at 8% above the Bank of England base rate for this lateness.
One of the key elements of your contract with a client or agency should be payment terms, which will indicate how many days after invoicing should you receive payment; each case will be different, as your payment preferences will differ from other contractors’. However, if you don’t specify any payment terms, it’s fair to assume standard 30-day terms.
If you find yourself in a late payment situation with a client that always pays on time, then you may want to give them the benefit of the doubt and consider carry on working for them until you receive payment. However, if you don’t know the client very well or they are unresponsive to your attempts to receive payment, you probably shouldn’t continue working for them.
You may send them a message to let them know that you will halt any type of work until you get paid; once you’ve received what you’re owed, then you can proceed with your assignments. If you would prefer not to work with that client any longer, as trust is likely to be gone, then you might want to terminate your contract instead of finishing up the project.
Communicate with Your Client
Contracting can, sometimes, feel like a gamble. You will work with people you’ve never met before, so you never know if they are going to be completely honest with you or whether they will delay your payments – or even not pay you – even after you’ve signed a contract.
But before assuming the worst, you should first give your client the benefit of the doubt. Open communication with them and talk about why you haven’t been paid yet, as well as when they plan on doing so. Most of the time, clients will quickly apologise and settle the invoice. This isn’t always the case, but it’s good practice to give your clients the chance to rectify what can be an honest mistake.
However, if a contractor has received payment late more than once, it’s natural for them to be suspicious. So, if this is your case and you find yourself getting paid later than usual on a regular basis, it may be time to re-evaluate your contract with a problematic client. The decision to terminate a contract can be scary, but it can also be a necessary step to avoid future stress. This way, you are also freeing up time to take on clients who pay on time.
Chase an Invoice
If you don’t want to sever ties with a client – even if they’re not paying you in a timely manner – it’s vital to know how to chase your unpaid invoice without ‘scaring’ them away. Once the payment deadline has come and gone, send them a casual reminder and, if you don’t get any reply, follow it up with their financial team. If you still don’t see any results, you can write a formal letter to your client announcing that you will charge them statutory interest if they still haven’t paid you by a specific date and time.
While charging this extra fee can help speed up the payment process, it’s still not a one hundred percent guarantee. Last year, businesses saw a staggering 27% of invoices paid late; some clients just plainly refused to pay, leaving one in four business owners struggling after getting £40,000 worth of unpaid wages.
If this happens to you, then maintaining a good relationship with your client may not be your priority anymore. In that case, to help receive your payment, you may want to go down the debt collection route. If all else fails, don’t hesitate to pursue this ‘last resort’; send the debt to a collection company that will manage the issue for you by seeking payment on your behalf. This is likely more useful for freelancers, but contractors may also have to resort to it. Of course, taking it up to the courts is also an option if you haven’t been able to receive payment for your work after trying everything.
Minimise the Risk of Late Payments
But how can you maximise your chances of being paid on time and minimise the possibility of late payments? We’re contractor accountants, so we’re aware of how important it is for contractors and freelancers to be paid on time – and we aim to help with this issue. Have a look at tips we compiled to make your life easier and help you to avoid such a serious problem.
Research a Potential Client
Being a freelancer or a contractor offers many advantages, including being able to choose your own clients. In order to prevent potential issues down the line, make sure that you thoroughly research any client that you’re thinking of taking on. You should already be studying their services and products, social media presence, audience, and more, before deciding that they’re the right match for you and your skills; you will want to analyse their reputation as well. This will help you to avoid making the mistake of entering a contract with someone with questionable work practices. You can do this by checking out their online reviews, for example.
Make it Easy for Clients to Pay You
First of all, you’ll want to make sure that your clients can easily pay you. Don’t overcomplicate it; set up several forms of payment if possible but, if not, ensure the chosen method is common enough that your clients won’t find it difficult to pay you for your work. You can set up payment by bank transfer, card, PayPal, and so much more, so invest in something convenient for both parties. Security is crucial as well so, if you’ve opted to be paid via digital payment, make sure your clients are taken to a secure page they can trust.
It’s important not to sit still if your invoice hasn’t been paid on time. Being proactive will get you the results you’re looking for, so follow up with your client or agency, either with a phone call or email. There’s nothing wrong with being polite, especially if it’s the first time you’ve had a late payment from them – however, if you still haven’t receive the money you’re owed, you can follow it up more forcefully to get paid and to ensure the issue doesn’t happen again.
Another thing you should keep in mind is that you should invoice your client or agency immediately. Don’t wait; as soon as you finish the work, send them an invoice with information on statutory late payment interest in order to prevent payment delays.
Request a Deposit
Whether you’re a contractor or a freelancer, you may want to consider a deposit payment which you receive up front – add this to your contract so it’s written down and agreed upon by both parties. By requesting a deposit up front (or, in some cases, half or even full payment), which can be anything from 10% to 30% of the total cost of the project, for instance, you can feel more confident and secure that you won’t be left ‘high and dry’. Even if you don’t get paid on time or at all, you’ll have, at least, part of the payment.
Use a Good Bookkeeping Tool
With the introduction of Making Tax Digital, choosing a cloud-based bookkeeping tool isn’t just an option, it’s a requirement. At Gorilla Accounting, we offer FreeAgent bookkeeping software, which allows you to store all of your information and documents in a secure and easy-to-access manner. This way, you can view your transaction history and invoices in real time, which will help you to stay on top of your payments, late or otherwise. Additionally, having these records keeps you organised and can be useful if you find yourself in the middle of a dispute over late payments.
We have been providing accounting for contractors for a long time, so we’ve seen it all. Most contractors will be paid on time, although late payment situations do arise from time to time; at Gorilla Accounting, we aim to help you navigate the contracting world, so we’ll be there for you as you grow your business. Browse our website to learn more about our services or, alternatively, use our contractor tax calculator to figure out your take-home pay.