Steps freelancers and small business owners can take to deal with late payments

Steps freelancers and small business owners can take to deal with late payments

Dealing with debts and disputes is unavoidable for most businesses, regardless of size, and since the economic crash of 2008/9, late payment of freelance invoices has become common.

Firstly, it is important to understand why this happens before looking at measures you can take to mitigate the issue and ensure you are paid on time, most of the time.

An overhaul of the Prompt Payment Code (PPC)1 with the aim of cracking down on delayed payments owed to small businesses was announced in January 2021. Under the new reforms, companies that have signed up to the Prompt Payment Code will be obliged to pay small businesses within 30 days – half the time of the previous payment window. However, the key to this reform is ‘companies that have signed up to the PPC’, which totals only 3,000 companies. This leaves thousands of businesses still operating, potentially with poor payment practices.

It is estimated that £23.4bn of late invoices (beyond the 60-day window) are still owed to firms across Britain, which is causing a negative impact on cash-flow to the business and its supply-chain, and in some cases risking the viability of the business itself.

 

Late payments could be based on the perception of value

While the issue is arguably a freelancer’s biggest problem, the issue is not isolated to freelancers alone and affects many small businesses, causing 50,000 businesses a year to close while costing the economy £2.5bn2.

Businesses withhold payments due to their perception of value as to who to pay first. For example, a business is more likely pay their IT provider over a freelancer they have hired to write content for them. A decision such as this can be due to the risk involved with non-payment or late payment. The IT provider is perceived as providing mission-critical services, whereas the copywriter may not be.

An IT/telecoms provider who is not paid could cut their services to the business who owes them money, which would significantly disrupt business operations. Whereas a content writer does not have that kind of latent influence over the business. Hence the perception of value of the IT/telecoms provider is higher.

 

The need to improve communications about payment terms

Another problem involved with payments is the hiring client not telling the supplier exactly what details must be provided to ensure they are paid. This information can include: a purchase order number, or obscure demands such as setting out an invoice in a specific way and in a specific font so that it meets the hiring party’s brand requirements.

And finally, the issue can (in part) be of the freelancer’s own making. Freelancers are typically nice people who do not like to rock the boat because they want to keep their clients. Many freelancers just want to do a job that they love and enjoy, and earn a living without too many complications. Due to this, there is potential for some businesses to think that freelancers are a ‘soft touch’ and that they will not kick up a fuss.

That is why freelancers need to be tougher on late payment practices and ensure they are fully prepared to fight for their livelihoods. This article aims to help provide some direction to help with just that.

What can freelancers do to get paid on time more often than not?

The best way to ensure you are paid on time is to set your terms and expectations at the outset and agree them with your client. Get signatures on the agreement/s just in case!

If you’re not sure what terms to set, then it’s a good idea to follow a ‘milestone payments’ rule.

  1. As part of the initial client discussion and agreement process it is wise to insist on a deposit up-front. A deposit payment financially ties both yourself and your client to the success of the project. Do not be tempted to present any work without the deposit, otherwise you will be giving your client the option to walk away, leaving you without any payment and potentially with some costs to pay. Many freelancers are asked to work for free in the form of a ‘pitch’. Don’t! Free work doesn’t pay the bills.
  2. Agree on milestone payments to ensure your cash-flow remains as strong as it can be. These typically come in two or three stages: deposit; first presentation; final delivery.
  3. Provide your clients with an incentive such as a 5% discount for paying invoices early.
  4. Inform your clients that you charge interest on late payments.

 

When does a payment become late?

You can claim interest and debt recovery costs if another business is late paying for goods or services. If you agree a payment date, it is usually within 30 days for a public authority or 60 days for a business transaction. You can agree longer than 60 days, but it must ensure what you agree is fair to both businesses3.

If you do not agree a payment date, the law states that payments are late 30 days after:

1. The customer gets the invoice.

2. You deliver the goods or provide the service.

 

When and how to add late payment interest to your invoices

The interest you can charge if another business is late paying for goods or services is known as “statutory interest”, which is 8% plus the Bank of England base rate for B2B transactions. You will need to send a new invoice to your client if you decide to add interest to the money you are owed.

You are also entitled to charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest for it. The amount you can charge depends on the size of the debt owed. You can only charge a business once for each payment.

Note: you cannot claim interest if there is a different rate of interest in a contract. Also, you cannot use a lower interest rate if you have a contract with public authorities3.

 

For example, if your business is owed £1,000 and the Bank of England base rate is 0.5%:

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

You are also entitled to charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest for it, with the amount you can charge depending on the size of the debt. You can only charge a business once for each payment.

 

Amount of debt

What you can charge

Up to £999.99

£40.00

£1,000 to £9,999.99

£70.00

£10,000 or more

£100.00

 

If you have been forced to charge late payment interest on your invoices, but still have not received payment, then you could consider further action. Taking legal action of any kind can be expensive and is typically viewed as the last resort. Ask yourself if taking legal action is worthwhile and if the size of the debt justifies it.

 

Taking further action

If you have put these points in place and your client is still late, then knowing how to deal with a difficult situation like this can save your business money, time and the stress associated with the dispute.

The key to debt collection is to act quickly, with a clear and logical strategy, as follows:

  • Send polite reminders
  • Pick up the phone
  • Contact the payment source directly
  • Issue a Letter Before Action (LBA)
  • Stop all future work and hire a collection agency
  • Arrange for mediation to see if you can resolve the issue amicably
  • Take the client to the small claims court.

 

How insurance protection can help reduce the cost of legal action

Legal action can be expensive, so it might be wise to ensure you are covered by Legal Expenses Insurance. This insurance policy includes legal assistance to help recover unpaid invoices. With Legal Expenses 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.

Click here for further details about Legal Expenses Insurance.

 

Accessing further legal resources and guidance

The Markel Law Hub is an online resource containing a range of documents and articles to help you manage the various laws you can encounter when running a business.

The Law Hub currently helps over 50,000 users and contains:

  • 800+ legal resources including contracts, policies, forms, and letter templates from Markel’s expert solicitors4
  • Legal updates, templates, guidance documents, checklists, and useful links
  • 460+ straight-forward guides4
  • 350+ links to key resources4
  • Up-to-date information on new legislation and case-law
  • Live Chat available Monday to Friday 09:00 – 17:00
  • Legal helpline

 

There are two ways you can access the Markel Law Hub.

1. Simply purchase a Legal Expenses Insurance policy from us, it only takes a few minutes via our online system.

2. If you do not require Legal Expenses Insurance but feel that you would benefit from access to the Law Hub, you can purchase an annual subscription for £189.00 +VAT. Click to the Markel Law Hub here for details.

 

 

Sources:

  1. www.gov.uk/government/news/government-tackles-late-payments-to-small      -firms-to-protect-jobs
  2. www.ft.com/content/2e62609a-f647-44ae-a84e-f56382685ec7
  3. www.gov.uk/late-commercial-payments-interest-debt-recovery/
  4. https://www.markellaw.co.uk/lawhub

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