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July 9, 2020

How to combat late payments as a freelancer

Written by Jack Lewis

Clients that pay late are a fact of life for all freelancers. But is the freelance community powerless? Dave Howell assesses the current late payment landscape and considers what all small businesses can do to protect themselves from late payments.  

Keeping cash flowing through your business is critical for long term sustainability. Research by Intuit QuickBooks makes for worrying reading as it is estimated small businesses, on average, are owed over £31,000. Further research from the Federation of Small Businesses also indicates nearly half (43%) of SMEs suffer late payments, with 78% waiting over a month longer than their stated terms for their invoices to be settled. 

Paul Horlock, Pay.UK CEO said: “It is concerning that so many smaller businesses are struggling because of late payments in 2019, especially as there are so many ways, they can now get paid. Offering customers a choice of payment or automated options can help remove barriers to make sure a bill is settled on time.” 

In a business environment that is being massively impacted by COVID-19, paying for goods and services on time, has never been more important. This is particularly relevant to keep the small business community that forms the bedrock of the UK economy alive and ready to emerge after the lockdown. 

Says the ACCA (the Association of Chartered Certified Accountants) “Persistent late payment can potentially depress business investment, especially in times of economic recovery – in turn reducing productivity, real wages, and overall growth. Micro and small businesses are less likely to increase numbers of employees or capital expenditure when faced with late payment.” 

Late payments can also harm the wellbeing of owner/managers in particular. Research by Xero concluded: More than two fifths (44%) say that late payments have affected their mental health. Worrying about late payments isn’t just worrying about money troubles. 

Commenting, Hugh Gage, founder of the Prompt Payment Directory said:  

“This is not a problem that can only be solved by the government or by big businesses regardless of who is considered to be the ‘perpetrator.’ Suppliers and the SME sector need to step up and shoulder their share of the responsibility.” 

Gage concluded: “That means doing effective due diligence before signing a contract and making sure that in house credit control is set up so that mistakes are minimised, and both parties are in full agreement with the terms of the contract. A history of late payment doesn’t necessarily mean that a customer is a bad bet; the context around that history is a vital piece of the jigsaw in assessing the risk level.” 

There is plenty of information available to ensure you manage payments efficiently. The range of guides from the Chartered Institute of Credit Management (CICM) is very useful. And if you work for large businesses, you can check when they pay suppliers on a government website. 

Protect yourself 

Dinghy spoke with Nicki Kinton – a professional credit control expert working with SMEs across the UK. Dinghy began by asking if the COVID-19 crisis will have a lasting impact on the late payment that is still present across UK business? 

“Undoubtedly. At the moment, many businesses are focused on grants, loans, and negotiating the deferment supplier payments. When this crisis has abated there is the potential for those businesses to have significant debts that creditors will want immediate payment for. But recovery is not going to be immediate, and businesses will still need to be supplied with goods and services to trade out of this. That means either having to pay upfront, which means no cash for existing debts or adding to their indebtedness with those suppliers.” 

Is charging interest on late payments effective? 

“Yes and no. Often just the threat of charging interest is enough to make sure smaller businesses keep their eye on the payment ball, but it is inconsequential for larger businesses. The administration of adding the late payment interest can be onerous. When payment is made for the original invoice value only, decisions have to be made about the cost-effectiveness of chasing for the interest amount.” 

Do you think the Small Business Commissioner can tackle late payment? 

“The remit of the small Business Commissioner is quite narrow. The focus is on tackling late payment by large businesses to smaller ones. However, in the UK only 7,700 of the 5.9 million firms are classed as large by the Governments own definition. Even if that remit was extended to medium businesses that would only include a further 35,600, much of the late payments in the UK, therefore, will be between the 5.82 million small and micro business. 

“That said, late payments, and therefore cash flow issues, are commonly cascaded down the supply chain, so any improvement in the payment practices of large and medium business should have a positive impact to all businesses in the longer term. The SBC needs more teeth to help achieve this.” 

Are the instances of late payments closely linked to poor terms and conditions and credit control? 

“Always! Micro and small businesses in particular often don’t engage in conversations around terms and conditions, so expectations and practicalities are unclear from the outset. Also, credit control is not always performed as a priority, consistently or with any structure, with it being part of someone else’s broader role.   

“That coupled with many individuals’ innate fear of confrontation means that talking to customers is usually the last thing to happen after a string of emails, rather than the first thing. A significant proportion of late payments are because of poor administration so the sooner you talk to your customer, the less likely that is to happen.” 

Will the Open Banking initiative have any practical and positive impact on late payments? 

“I don’t think so. Open Banking aims were to streamline lending decisions and improve access to financial service products, but as we have seen with CBILS, that has not really been evidenced yet. Yes, it should be easier for businesses to manage their own finances using direct feeds to their accounting software, which should enable better cashflow forecasting and spending planning. Still, there are soft skills required to make that happen as well as technology.” 

What is your view will the future of late payments look like with a backdrop of austerity right across the business environment? 

“Unless a maximum allowed payment term period is legislated by the Government, with enforcement powers for all UK businesses given to the SBC, then it will difficult to convince businesses that are voluntarily shortening payment terms is the right thing to do as they all try to make their money go further for longer. Late payments will, therefore, continue to be the norm for a vast number for businesses for some time to come.” 

“There are some businesses out there that are doing well, because of, or despite, this crisis. They will need suppliers as their customer base grows. Now, more than ever it’s vital we keep communicating so we can clearly understand the impact of COVID-19 on our customers, positive or negative, and we can act accordingly.” 

Your checklist 

As a small business owner, there are many practical actions you can take to minimise late payment. Use this checklist to ensure you always get paid on time. 

  • Due diligence 

Before working for a company, take a look at their trading history. Companies House has all accounting records that can be searched. This indicates how solvent a business is. Other sources of information include The Prompt Payment Directory and Checklate, which can add to your overall impression of how well a company pays its suppliers. 

  • Terms of business 

Your payment terms should be clear and concise. Terms should be attached to all invoices. And where a contract is in use, the payment terms should be agreed before commencing any work. “Stating clear payment schedules in your invoices is the first step to try to reduce late payments. Every invoice should include a payment deadline to help your clients understand that payments are expected on time,” advises John Ellmore, Co-Founder, 

  • Purchase orders and contracts 

Ask the company you are working for whether they use purchase order numbers or contracts with reference numbers. If they do, get these numbers as early as possible in your working cycle. This will ensure you can then invoice promptly. 

  • Essential invoice information 

Often late payments are made because vital information is missing from a submitted invoice. All your invoices should include:  

  • The word ‘invoice’ displayed prominently
  • Any purchase or contract number
  • The full accounting address of the company you are working for.  
  • Your business’s name, address and company number if you are limited or a partnership
  • Bank account details. For international customers also include your account IBAN/BIC/SWIFT numbers
  • VAT number if you have one
  • The date the work was supplied
  • A description of the work you did
  • The amount due
  • Payment terms and ways to pay
  • Sending your invoice

The business you work with might have a specific email address they need all invoices sent to. Double-check, you are using the right email address. Also, find out the name of the accountant in charge – and if possible – their email address. You can then use this email address for queries or to chase late payments. 

  • Chasing payment 

Once your payment date has passed, you should have a system in place to begin chasing payment. Contact the accounts department, as often, late payment is an oversight on their part. Your invoice may have been missed off their payment run. Make regular contact with a named person in the accounts department if you have one. Also, sending a statement of account can be a useful tool to nudge payment along. 

As the COVID-19 crisis continues, freelancers and micro-business owners need to ensure cash consistently and reliably flows through their businesses. Settling invoices on time is essential to ensure we continue to have a vibrant and diverse small business sector in the future. 

It may also be worth investing in some insurance to protect yourself from all of the above – we hope you’d never have to use it, but peace of mind is priceless. We here at Dinghy offer a unique cover package called Freelancer Assist, an insurance product that will chase your unpaid invoices, support you with tax investigations (including IR35), provide legal and tax advice, offers a free counselling service and more. 

To get a quote, simply start here. Or to simply learn more about how Dinghy can help you manage freelancer life, take a look around our main site, drop us an email or give us a call on 020 3974 2705 – we’re always here to help. 

About Jack Lewis

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