A study carried out last year by the Asset Based Finance Association, a trade body representing the asset based finance industry in the UK, unearthed the degree to which unpaid and late invoices are impacting upon small businesses in the UK. The findings of the survey, published in September 2015, were that UK businesses were owed more than £67.4 billion in unpaid invoices. Not only was this figure shocking in its own right, but it also represented an 8% increase on the figure from the year before. Add to this the fact that the average waiting time for payment had risen to 72 days – up from 61 days in the teeth of the recession in 2009 – and you have a situation which represents a definite and genuine threat to the well-being of smaller businesses.
The dangers inherent in an invoice for services being paid later than you expect or want it to be paid are clear. When you invoice a company, you are setting out the service or goods you have provided for them, along with the details of when and how you expect to be paid. More importantly, you are detailing work which represents an expense on your part, and when an invoice becomes overdue it can wreak havoc on your cash flow. With money going out but not being reimbursed on time, you may have trouble performing basic tasks such as buying supplies, clearing bills or even making statutory payments.
When setting out your invoice details it’s vital that you make sure the person receiving the invoice knows exactly what you expect of them. Explain clearly exactly when you expect to be paid, and which method you expect them to use. In most cases, a 30-day limit is set, although the nature of your business might mean that you require payment immediately after sending an invoice when the work is complete. According to the law, thirty days represents a reasonable length of time to wait for payment, and you might want to point this out if the client asks for longer to make payment.
Whether you give them longer or not, ensure that the invoice due date has been firmly established, and point out that the Late Payment of Commercial Debts Regulations 2013 makes it plain that interest can be charged upon payments which miss the due date.
Another one of the key problems associated with unpaid or late invoices is the sheer time and energy they can end up diverting from what should be your primary job – running your business. If your accounts aren’t kept fully up to date it can prove difficult to keep track of exactly when an invoice becomes due, when it is late, and when enough time has elapsed for action to be taken. This is particularly the case if your business sends out multiple invoices to a wide range of clients.
Chasing the Payment
When it comes to chasing a late invoices, the key is to try to keep things on a friendly basis. You have to bear in mind that your customer might have a genuine reason for delaying payment, or that you might not have made the terms of the invoice clear enough. It may help to send a friendly reminder a week or so before the payment is due, just to confirm the date upon which it will be going out. It’s vital to remain polite throughout this process for a variety of reasons. You may wish to work with this client again in the future (presumably once any invoicing issues have been resolved) and the polite approach is far more likely to yield positive results, particularly if the client has genuinely just forgotten to pay the invoice in question.
Once the invoice is three or four days late, you are well within your rights to begin chasing for payment. Begin by sending a couple of emails reminding that the invoice is now late and, if this doesn’t work, follow up with a personal phone call. It could be advisable at this time to ask someone else to chase the debt on your behalf. This will free you up to spend the time working on the rest of your business, and it will underline how seriously you are taking the situation to the person being chased for payment. Whether you pay for the services of a professional debt collector or legal representative at this time will depend upon factors such as the size of the unpaid debt and how reasonable or not the client is being about meeting their obligations.
You should not hesitate to begin charging interest on the money you’re owed, although you should have given the client fair warning that you would do so when the invoice was agreed. Current government legislation says that the interest you can charge on late payments is 8% of the money owed plus the Bank of England base rate. The details of the precise calculation can be found here. If you opt to start charging interest, you should send the client a revised invoice, with the interest included. Not only will this create a paper and electronic trail, but it will also transmit the message that you are serious about getting your money.
Avoiding Late Payments
Of course, no tips on dealing with late payments will ever be as useful as managing to avoid them altogether. Whilst this may seem to rest purely in the hands of the client, there are steps you can take when invoicing in order to minimise the chance of any problems. The first piece of wisdom would be to choose your clients as carefully as possible. Prompt Payment Code is a voluntary agreement set up by the Department for Business, Energy and Industrial Strategy, and clients who have signed up to the undertakings of the code are less likely to pay late. Secondly, ensure that the client has all of the paperwork necessary to make the payment, including the details of the work carried out and the payment terms.
In many cases, it may be advantageous to ask for a percentage of the payment before carrying out the work, or even the full amount. Whilst this would guarantee regular cash flow, it may not go down well with all clients. If a client objects, explain to them that, as a small business, you rely on steady cash flow, and offer to revert to a standard 30-day payment system once you’ve established a working relationship. Establishing a bond of trust in this manner – by ensuring that the work is delivered on time to the desired standard – should ensure that payments are made promptly going forward.
The frustrating aspect of the situation for many smaller businesses is that chasing late or unpaid businesses can come to take up almost as much time, if not more, than the actual core activity. By utilising the services of ContractingWISE, you’ll be able to take advantage of expert help and avoid many of the problems detailed above in a quick and simple manner, leaving you free to get on with what you do best.