Over a fifth of freelancers and SMEs experience an increase in late payments

A freelance small business owner sat at her desk reviewing her business figures.

In this article, Rob Rees, Divisional Director at Markel Direct, looks into how late payments are affecting the freelance and small business market and shares eight tips for safeguarding your finances.

Late payments are a quiet, yet powerful economic disruptor. Whilst they wreak havoc on businesses of all sizes, studies show that it's freelancers and small and medium enterprises (SMEs) who often bear the brunt of this problem. In the aftermath of late payments, freelancers and SMEs are facing extreme financial instability, debt and even business closure.

Late and non-payments on the rise for small businesses

In today's climate, marred by surging inflation, a cost-of-living crisis and energy price hikes, late payments are a growing threat to small businesses. When we ran a survey of 560 freelancers and SME owners earlier this year, it revealed that:

  • 22% had experienced an increase in late or non-payments last year
  • nearly half of respondents had payments owed to them that were more than 15 days overdue
  • 13% didn’t get paid at all and had to write off the money owed.

Late payments create a perfect storm of financial woes for small business owners, including difficulty paying their own staff and suppliers, managing cashflow and reinvesting in their business. As a freelancer or contractor working solo, one client paying late can have a direct impact on your ability to pay household bills and mortgage payments.

Put simply, getting paid on time can be the difference between a thriving business and one that struggles to survive. Taking this into account, as a self-employed professional or small business owner, it is vital that you’re armed with the right knowledge to help future-proof your finances from unexpected issues, such as late payments.

How to protect your business against late payments

From ensuring you have a robust contract in place for each and every client to incorporating milestone payments, here are some essential steps you can put into action to protect your business against late payments.

1. Research new clients and their credit history

Before working with a new client, be sure to do your due diligence.

With credit reports and credit scoring services like Experian and Equifax, you can check a client’s financial stability and payment track record.

These services can help you identify red flags and make informed decisions about whether to work with a particular client. In the long run, this could save you from the frustration and financial strain of dealing with late-paying or non-paying clients.

Other checks to consider include:

  • Carrying out a search of the official Register of County Court Judgements
  • Asking for references on your client from suppliers and banks
  • Checking the prospect’s website for legitimacy and feel

2. Ensure you have a signed contract in place before work commences

Before starting any work, having a clear written contract in place between your business and the client is essential. Without a contract, chasing a non-payer is much more challenging from a legal standpoint.

If a client refuses to pay you for the work you’ve carried out, your contract is there to protect you as well as your relationship with the client. Having your contract in writing, rather than being verbally agreed, will also help to avoid misinterpretations.

Ensure that your contract includes how and when you will be paid. This includes details of:

  •  payment milestones
  • invoicing terms
  •  all payment due dates
  • late payment interest or fees (on business-to-business debt if applicable)
  • accepted payment methods

For more advice, put together by a solicitor, on what to include in a contract, click here.

3. Consider including milestone payments or asking for a deposit

Implementing a three or four stage milestone invoicing system can help to ensure you get paid for your work.

Splitting the payment into several stages for a project will ensure you receive payment and ensure your client keeps a vested interest in the project’s success. It can also help to ensure your cash-flow remains strong, instead of waiting until the end of a project to receive payments which could take months. Breaking down the project fee into smaller amounts will also benefit your client.

Here is an example of how milestone payments could work for a project that lasts 6 months:

A graphic showing the four stages of milestone payments.

Alternatively, you could request a deposit. By asking for an initial deposit upfront or breaking down payments into stages based on project milestones, you can foster transparency and trust between you and your clients by aligning their payment obligations with the delivery of agreed-upon results, creating a win-win situation for both parties.

4. Charge a late payment fee

Including a term in the contract explaining that a late payment fee will be charged if they fail to pay on time, may encourage clients from the offset to ensure their payments are made on time.

The interest you can charge if a client is late in paying for your services is called ‘statutory interest’. Statutory interest is set at 8% plus the Bank of England base rate for business-to-business (B2B) transactions. If you opt to add interest to the money you are owed, you will need to send a new invoice to your client.

Here is an example from the GOV.UK website on how to work out interest owed. If your business is owed £1,000 and the Bank of England base rate is 0.5%:

  • The annual statutory interest would be £85.00 (£1,000 x 0.85 = £85.00)
  • Divide £85 by 365 to work out the daily interest: 23p per day (£85 / 365 = £0.23)
  • After 50 days the total would be £11.50 (50 x £0.23 = £11.50)

When does a payment become late?

If you have agreed on a payment date in your contract, usually it’s considered late after 30 days for public authorities or 60 days for business transactions.

If you haven’t agreed on a payment date, legally the payment is considered late 30 days after either:

  • the customer receives the invoice
  • you provide the service (if this is later)

5. Have a procedure for chasing late payments

It pays to have a well-structured system in place for dealing with overdue payments.

As soon as a payment deadline is missed, reach out to your client by phone. Maintain a friendly and professional tone during the conversation, as there might be a valid reason for the outstanding invoice.

Clearly communicate the outstanding balance and inquire if there's a specific reason for the delay. Attempt to agree on a new payment date. If your client can't provide a date immediately, offer to call the next day after they've had time to review.

It’s also worth sending a follow-up email to document the conversation and create a dated paper trail. If the client still hasn’t paid after your initial contact, send email reminders and follow up with a phone call. Many accounting software solutions can automate email reminders, reducing administrative work. Be assertive, cautious of excuses and press for a definite payment date.

If after this, the payment remains unreceived, be prepared to take action and clarify the consequences of non-payment to your client. For instance, you can send a written notice explaining your intent to exercise your statutory right to charge interest and seek compensation to cover debt recovery expenses.

6. Contact a professional mediator or Small Business Commissioner

Our research revealed a surprising statistic - only 4% of respondents said they consulted the Small Business Commissioner, Citizens Advice or similar organisations about their issues with late or non-payments.

Another 56% of respondents were unaware that they could seek advice from such organisations on these challenges.

Occasionally, clients may refuse to pay due to disputes over whether the delivered services or products align with the initial agreement, or because the customer cannot pay the full amount upfront.

If those are the reasons behind late and non-payments, enlisting the help of a professional mediator can be necessary. This approach is often cheaper (if you don’t have business insurance that can cover your costs) and provides more flexibility compared to taking legal action.

If mediation proves ineffective or is not an option, you may choose to file a complaint with the Small Business Commissioner, who can investigate your case and potentially facilitate a resolution.

7. Consider taking legal action

When all other avenues have been exhausted and late payments continue to plague your business, instead of writing off the money owed, it's worth considering legal action. While it’s not a decision to be taken lightly, it can become a necessary course of action to safeguard your financial interests.

If you have legal expenses insurance in place, your insurance provider may be able to help with covering legal fees and getting the issue resolved. Alternatively, you can seek advice from a solicitor who specialises in debt recovery.

Whilst pursuing legal action should be a last resort and efforts to resolve the issue amicably should precede it, it’s important to remember that you are within your rights to take this step.

Pursuing legal action should be considered as a last resort. Prior to taking this step, every effort to amicably resolve the issue should be made. However, it's equally important to recognise that you are within your rights to take this step.

8. Speak to your insurer to see if they can help

If you’re having trouble with receiving payment from a client, it’s always worth checking your insurance policy to see if it includes legal help. At Markel Direct, we provide our business insurance policyholders with access to a 24 hour legal advice helpline, as well as access to Business Hub, which contains legal document templates, put together by solicitors, to help with late payment problems.

Having access to valuable advice from experienced legal professionals can help you navigate challenging situations and give you the best chance of getting paid quickly.

Whilst there is no sure-fire way of protecting your business from late payments, taking these precautions can help SMEs and freelancers ensure they are in the strongest position to protect their finances and mitigate risk.

Legal expenses insurance

As we touched on earlier, legal expenses insurance can provide legal assistance to help recover unpaid invoices. With this insurance, you have the backing of an entire legal team and the policy provides cover up to £100,000 in ‘any one claim’ to cover the costs incurred by a legal proceeding. Without this insurance, if you’re paying for legal fees out of your own pocket, it can quickly cost thousands.

More broadly, legal expenses insurance is designed to cover the expenses associated with pursuing or defending against certain legal actions. Given the significant potential for disputes with parties like clients, suppliers or employees, having the safeguard of legal expenses insurance can prove to be a valuable asset for your business.

Legal expenses insurance from Markel Direct comes at a set price of £56 a year or 10 payments of £5.60 a month.

Find out more

Cover starting from £8 a month