If you are fretting over late payments from your clients, you are not alone. According to research by Pay.UK, which runs the Bacs direct credit and direct debit payment services, SME late payment debt rose to £23.4bn in 2019 and that UK SMEs face a total bill of £4.4bn a year just to collect money they are owed.
With the economic downturn, and the difficulty of finding clients, many small businesses are simply accepting these late payments as a cost for keeping afloat. However, it doesn’t necessarily have to be this way. Read on to understand your rights over late payment, and techniques that help you walk that tightrope between getting your money back and keeping your client.
Remember That Money Was Rightfully Earned
Not only do many people worry about potentially losing clients, but they also get embarrassed at asking for money. You must overcome this attitude because it can lead to misunderstanding and bad communication. What do I mean? Not being comfortable with something means you tend to put it off and then do at the last minute. If you do this with your clients, you will come across as unprofessional and hard to deal with. Make sure you create clear invoices with sufficient time to pay, and always maintain your manner.
Be Upfront and Clear About Payment Terms
This follows on from above and the importance of clear communication. Make sure you address your payment terms in the quotation, or in an email, and seek clarification that your client is happy with them. When you send the invoice ensure the payment terms are written clearly on it.
Know Your Rights on Interest Charges and Let Your Customer Know
The law states that customers must pay their invoice within 30 days of receiving it, and if they do not you are entitled to charge up to 8% + the Bank of England base rate.
When you send out an invoice it is best to state that clearly because it will sharpen your customers’ mind. It may be the practice of a business to pay their invoices late because they are themselves trying to make their capital work for them. If they know that they will ultimately end up paying more, they will opt to pay that invoice on time.
Even if you don’t write that on the invoice you are entitled to claim it. If a payment is coming up, send a polite email to remind the person concerned that you intend to charge interest. They may worry about getting themselves in trouble with their accounts department and make sure the invoice is paid.
Note: You are also allowed to pass any debt recovery costs on the client.
Don’t Take It Personally
This may be hard to follow as it is your livelihood, but remember business is business.
In the first instance you don’t know that what they are doing is deliberate or that they don’t have their own cash flow problems. I have known many businesses who have had to chase their clients every month, but that client has remained as one for many years.
In addition, if you get angry with your client it will mean the end of the relationship, and perhaps a determination on their part to push it to the limit before they pay.
Let Your Customer Know How Much Interest is Being Accumulated
Rather than just say you will charge them interest, do the calculation so they know how much they owe - It illustrates you mean business and won’t be backing down.
If they are ignoring your mails and reminders, stop doing what it is you do for them – If it is vital for the running of their business it will usually be enough to get them to pay.
This may sound extreme and begs the question why you would continue to work with them, but as I mentioned above some companies will do that every month. It is their style.
If you build up your business sufficiently that you can drop them, then great. Otherwise, remain pragmatic.
Give Them A Call
Emails are easy to ignore; we have so many daily, we are all really good at scanning through them at speed, often mentally making the decision that if something was serious a person would call.
Talk to the person you work closely with. If that doesn’t work call directly to their accounts department.
Pursue or Threaten Legal Action
This is a last resort, but sometimes necessary. It is also not that difficult or expensive. You have a few options:
You can take them to a small claims court – County Court. If they get a judgement against them it will adversely affect their credit rating for six years.
Mediation – This step is probably before taking them to County Court and the cheaper and faster way to resolve.
You can also use Money Claim Online, a recently set up option for claims under £100K. It is cheaper than going to County Court and it can also still result in your client getting a bad credit rating for six years.
Debt Collection Agency
Despite the negative press most debt collection agencies are very professional and just act as an extra resource to chase your debt. They will take a low percentage of the value of the debt they recover; in some circumstances you can sell the debt to them and they resolve themselves.
Due Your Due Diligence
One of the best ways to solve a problem is to try and mitigate it in advance. You can do this by looking up information about the business, for example, how long it has been established for, its capital, and any reviews around doing business with the company.
If something rings alarm bells, trust your judgement and either don’t work with them or try and insist on some, or all, of the payment upfront. This is something you might want to do regardless.
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