How to pursue unpaid invoices
The late payment of invoices can present major financial difficulties for small businesses, freelancers and contractors.
Highlighting this fact, a survey carried out earlier this year by the Federation of Small Businesses revealed that nearly one in 10 businesses polled (8%) claimed that late payment was threatening their viability.
So what rights do you have when it comes to claiming money from your clients for the products or services you have provided? In this guide, we explain how payment terms work and offer our opinion on how to make sure you get the money you’re owed.
When does an invoice have to be paid?
Unless otherwise specified, payment terms for both public and private sector payees are 30 days. If you specify a payment date, it must usually be no more than 30 days for public bodies and 60 days for private companies.
If you don’t agree a payment date when you create an invoice, the payment is legally deemed to be late from 30 days after either the customer receives the invoice or you provide goods or service (if this is later).
How to ask for invoice payment
As a small business owner, freelancer or contractor, the relationships you have with your customers are likely to be extremely important to you. However, you shouldn’t let this deter you from chasing payments in a polite but firm manner. The fact is, if you have supplied the products or services as agreed, you should be paid.
Before you start chasing, make sure that you supplied the invoice correctly. Bear in mind that customers won’t necessarily inform you if they’re not paying because there was an issue with your invoice. Therefore this is something you should check yourself. You should also ensure that the invoice was definitely received by the appropriate person or department.
Once you’ve done this, you can start to chase using informal tactics such as calling or emailing to remind the customer that payment is overdue. If necessary, you might have to mention the steps you can take, such as ceasing the supply of your products or services, or charging interest on unpaid debts.
If late payment is a common issue among your customers, it may be beneficial to create a timetable for monitoring and chasing payments. There is also accounting software available that can automate this process.
How much interest can you charge on overdue invoices?
You have a statutory right to charge interest on late payments. The amount you can charge is the Bank of England (BoE) base rate plus 8%. So, for instance, if the BoE base rate is 0.75%, you can charge interest at 8.75%. This applies to sales to all businesses and public sector organisations. Note that it is not compulsory to charge interest ‒ you can decide if this is something you wish to do.
If you are charging interest, you will need to send a separate invoice to your customer setting out the new amount due. To do this, simply add a new line specifying the interest owed.
As well as claiming interest, you can claim debt recovery costs. The amount you’re permitted to charge depends on the size of the debt. For example, you can impose a charge of £40 for debts up to £999, while for debts between £1,000 and £9,999, you can charge £70. For debts exceeding £10,000, you can charge £100. If you do factor in these costs, this will also need to be specified in your new invoice.
What to do if an invoice isn’t paid
If a customer still doesn’t pay up after you’ve taken these steps, you will need to decide how to proceed. In certain circumstances, negotiation can help. For example, if there is a disagreement over whether the service or products provided were as agreed, or if a customer is having financial problems but may be able to pay some of the money owed now or agree to a payment plan, then negotiation may help you to move forward constructively. You can get a professional mediator to help with this. The mediator should be agreed on by both parties. This option can be cheaper and offer more flexibility than taking a client to court. It’s important to note that the costs of mediation are shared, so this is something that both parties will need to agree on.
If mediation isn’t an option or doesn’t work, you might decide to make a complaint to the Small Business Commissioner, which may be able to investigate the case. Alternatively, you could decide to take legal action, for example sending a solicitor’s letter or getting a binding decision from a judge. Taking the legal route can be expensive and time consuming though, so other avenues should be explored first if possible.
The importance of a contract for services
Chasing money owed to you by customers can be a stressful and resource-draining activity ‒ and it’s one that you would no doubt rather avoid. This is one of the reasons why it’s so important to have a strong contract for services in place before you provide products or services to clients. This contract should cover all of the essential clauses in your arrangement with the client, including payment terms. Clearly setting out your requirements when it comes to payment in this document and ensuring that it is signed by the customer before you provide your products or services to them can help to avoid any confusion or disagreement further down the line.