A contractors guide to collecting debts

Debt collection. It’s a term that creates the image of burly henchmen terrorising blameless innocent types, usually of a slender frame; they are often grabbed by the collar and pushed against the nearest wall. But, for the contractor it is they who are the real victims when hard work goes unpaid. The following is a guide on how to manage the problem of client non-payments.

The importance of clarity

Before you commence work, it is important that a detailed job specification document is drawn up and agreed by both parties. There should be no vague wording, or issues open to interpretation.

Here’s an example of a bad specification for making a cup of coffee:

- Take the coffee beans (which coffee beans?)
- Put them in the grinder (what standard of grinder?)
- Put the ground coffee in the coffee machine (which brand of machine?)
- Pour and serve (do they want milk, sugar – if so how much?)

The moral of this example? It’s important to be very specific.

You should also make sure you have a written agreement detailing when payment is due – and exactly how much. This could be a ‘terms of business’ document, it may not be required by law, but for obvious reasons it is advisable.
Just before payment is due for your work, contact the client to remind them.

When payment becomes late

In some industries, it is customary for clients to pay before the end of the month which follows the invoice month, leaving a possible credit period of up to 60 days. When there isn’t an agreement or custom in place, then the law stipulates a default credit period of 30 days.
The credit period begins either on the day the work is completed (or when the goods are delivered), or the date when the customer receives a notice of payment due – whichever of these is the latest.

When the client doesn’t pay

So, the client seems unwilling to pay for the services you have offered despite passing the credit due date. What do you do? Firstly, try and avoid getting a third party involved.

Speak to the client and ensure that they fully understand the situation (this is where the importance of a detailed job specification document comes into play). Try some good ole’ fashioned polite persuasion. It is best practice to receive payment directly – both for your own business reputation, and for your own coffers. Remember: courts cost money; and so do debt collecting agencies – though, if you’re lucky you can get the money back in both cases.

If you’ve done everything you can to speed up payment and still the client is showing zero inclination to hand over the money for your hard graft, then it’s time to get help…

Who should I turn to?

You can recover the money owed through the courts or via a debt-collecting agency.

Courting assistance

Legal action should really be a last resort for a freelancer or contractor. Before you involve the courts, make sure that it will be cost-effective, and ensure that your customer is able to settle – otherwise you could be wasting money on a non-recoverable debt. Here are the advantages and disadvantages…

Advantages:
- You can indirectly employ the services of a bailiff to recover your debt, or, if it is a large sum, the Sheriff.
- Court fees will often be added to the client’s debt, meaning you can recover both.
- You may be able to charge interest under the Late Payment of Commercial Debt Act 1998.

Disadvantages:
- Going through the courts can be costly with no guarantee of your debt being recovered.
- Your client may be working from home, in which case the bailiff or sheriff may not have the right to force entry.
- The process can be slow and laborious.
- It is a sure-fire way to irreparably sour relations with your client.

Indebting yourself to collectors

Debt collecting agencies often get a bad press, but as with all industry sectors there are good and bad options. You should not feel guilty about employing debt collectors if you’ve tried every alternative to recover the debt. But to ensure you take an ethical route, check out Creditsafe Ltd – the only debt-collecting agency in the UK approved by the Professional Contractors Group(PCG).

Advantages:
- Progress is usually fast and reports are detailed.
- Their fee can be fully or partially funded by the debtor.
- If they’re working on a commission basis then it’s in their own self-interest to collect your money.
- Debt collectors can help resolve a dispute if the client defends the claim. And they can do so in a more cost-effective way than going through the courts.

Disadvantages:
- Varying ethical standards of debt collecting practitioners. The actions of a hardline agency could damage your reputation
- May create bad feeling between the two parties – dependent on the context of the action taken, and the standards of the agency.
- Can be expensive – their commission is usually 8-10 percent for commercial debts.

Summary

Before you take any action in recovering debt, make sure you have a good chance of success. After all, you don’t want to spend money chasing a client who legitimately doesn’t have anything to give. There are a number of techniques you can use to gauge the ability of a customer to pay up. If you’ve managed a constructive dialogue with them, then you may have gathered a few clues. If your client has limited company status, you can get a credit report for a small fee.

It’s important to employ a third party to recover debt only as a last resort because if that same client has more upcoming work (which they can pay for) then they’re unlikely to employ someone who’s just sent the debt collectors round their house for a slightly late payment.

The best practice is to simply ensure that good clear communication and documentation is maintained from the outset of the work you undergo for a client. This means that if the client does give you the run around, you know that you’ve done everything correctly from your end – and that you can prove it.