Late payments - how do you chase an unpaid invoice?

Dealing with late invoice payments and unpaid invoices can feel a bit like walking a tightrope. On one hand is the need to push clients for prompt payment. On the other is the desire to keep things cordial, continue doing business with them, and stop the relationship crashing and burning.

When it comes to freelancing, contracting, or running a small business, veterans and novices alike can attest to one thing – a late invoice payment is a royal pain. And not getting paid at all doesn’t even bear mentioning. The payment terms on your freelance invoice template are not there to be ignored after all, and it can become a legal matter in a short space of time when this does happen.

Yuno Juno, writing for Contractor Weekly, reported that over half of the UK’s freelancers were working for free thanks to unpaid invoices. One in 10 even say they do nothing when a client pays late.

Silent killer

According to Anil Stocker, co-founder and CEO of the financial technology company and peer-to-peer lender, MarketInvoice, “Late payment is the silent killer of modern business.” His firm spent the last five years looking at 30,000 invoices issued in over 93 countries and their research noted a “harmful practice” of late invoice payments and unpaid invoices.

MarketInvoice found that a shocking 62% of invoices in 2017 were paid late. The UK averaged 66%, the US 71%, and Europe 73%. The report also claims UK companies are paid an average of 18 days late.

The net result is that to stay afloat and in the black, UK firms have to set aside solid chunks of time every week to chase late-paying clients. This time could otherwise be spent pitching, promoting, and growing a business – precious time that can never be clawed back.

The problem is even more acute in the public sector, with nine out of ten public sector suppliers saying they have been paid late, despite governmental measures put in place to force all public sector bodies to settle invoices issued by SMEs within 30 days.

What are the effects of late invoice payment?

Late payments are anything but a minor inconvenience. They can (and often do) have major consequences – not least the adverse effect on cash flow and the inability to pay staff and suppliers on time.

Moreover, late payments can cost you your business. Research from Siemens Financial Services reported in Smallbusiness.co.uk found that late invoice payments meant small businesses could not access up to up to £250 billion of cash they were entitled to. In 2015, a global provider of e-invoicing, invoice financing, and spend analytics, the Tungsten Network, surveyed 1,000 senior decision-makers in SMEs. About 23% said that late payments put them at risk of closure. And with these closures is the potential for scores of job losses, too.

What is a credit period?

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.

In some industries, it’s 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 in place, then the Gov.uk website states that the customer must pay you within 30 days of getting your invoice or goods or service. In other words, a credit period of 30 days.

What reasons are given for unpaid invoices?

There’s a bottomless pit of excuses on hand for unpaid invoices but, more often than not, it boils down to poor credit management.

It could be something completely innocent, like your client not having a purchase order number for you or invoicing the wrong entity (yes, it’s been known to happen). Or it could be more calculated, such as your client disputing an invoice simply to avoid paying it. Then there are situations where the client is genuinely disputing whether or not your service has been properly delivered and has withheld payment accordingly.

Regardless of the reason behind it, late payment – and especially non-payment – hits your pocket no less hard.

How to chase an unpaid invoice (without chasing your client away)

So, your payment deadline has passed and all you can hear is the sound of, well, silence.

First, shoot a casual payment reminder email over to your client and, if you don’t get any joy (in terms of a meaningful response), follow-up with a call to their accounts department. If neither of these methods yields any fruit, you may want to get a bit more formal. We have some free Late Payment Reminder letter templates for you to use.

Write a letter or email to your client stating that, if your invoice isn’t paid within a certain number of days, you’ll charge them statutory interest, which is 8%, plus the Bank of England base rate for business-to-business transactions, which in October 2018 is 0.75%. So, the total statutory interest payable on the invoice would be 8.75%. We’ve got an article about what interest you can charge on late invoice payments with further details.

While conventional wisdom suggests charging late payment interest can help the payment process, small firms are somewhat reluctant to stake their claim. According to Zurich Insurance’s latest SME Risk Index, Britain’s small-and-medium sized enterprises are owed in total an estimated £44.6 billion in late payments, with one in five business owners owed over £25,000.

Previous research from Zurich suggested that only 20% applied (or tried to apply) late payment interest on unpaid invoices, hopefully armed with this information you’ll feel confident of your rights if you’re ever in this situation.

Using a debt collection agency

Another way to handle late invoice payments and unpaid invoices is to use a debt collection agency, such as our very own Crunch Collections.

Debt collection agents don’t have any special powers and reputable firms won’t intimidate debtors. They just do all the running for you – write letters, make phone calls, and so on.

They operate on a “no collection, no fee” basis and usually charge between 5% and 15% of the amount collected. Again, this depends on the volume and complexity of the debt. In certain circumstances, you can assign the unpaid invoice to an agency, which then becomes the legal owner of the debt.

A good debt collection company will handle the process of sorting your unpaid invoices delicately, ensuring you don’t put yourself at risk of losing the client forever.

Getting solicitors involved

If your client steadfastly refuses to pay, you may need to take things a step further. A solicitors’ firm that specialises in debt recovery typically charges an hourly rate or a percentage of the value of the unpaid invoice (usually around 10%). Generally speaking, the costs you’ll incur will depend on the size, age, and complexity of the debt owed.

To locate a solicitor that offers debt recovery services in your area and is regulated by the Solicitors Regulation Authority, Find a Solicitor is a free online service run by the Law Society.

Whether you use a solicitor or a debt collection service, you’re entitled to charge your client a fixed sum for the cost of recovering a late payment (this is in addition to claiming statutory interest). The sum depends on the size of the debt.

Money Claim Online

If you want to save money on solicitors and debt collection agency fees, using the Money Claim Online service is a good way of doing so. Plus, you can still use it to recoup your costs.

If you’re a sole trader or a limited company owed a fixed sum of less than £100,000, all you need to do is register for a UK Government Gateway account and spend half an hour or so completing the small claims court form.

The way it works is that your client will receive a letter from court prompting payment. If they don’t cough up within a certain period of time (and some don’t), the court will register a County Court Judgment (CCJ) against your client, which is like having a huge black mark against their credit score for the next six years. However, a CCJ doesn’t guarantee payment and you may still need to take further action to recover the debt.

Something to bear in mind if opting for this route is that it’s highly likely to pour cold water on whatever business relationship you had with your client, so don’t go expecting any more work from them.

How can you prevent late payment?

The best way to prevent yourself from running around after late payments and unpaid invoices is to be fanatical about credit control.

These six simple steps will help prevent your invoices sliding down your client’s to-do list:

1. Put the feelers out on your would-be client’s reputation and run a credit check before adding them to your roster
2. State clear payment terms in your Terms and Conditions of Business – when payment is due, overdue, and so on
3. Prior to starting work, request payment up-front or, at the very least, a deposit (especially for larger contracts)
4. Invoice immediately once you finish the work and include information on statutory late payment interest (and don’t hesitate to apply these charges to late-paying clients)
5. Schedule polite payment reminders before the invoice falls due
6. Make friends with the person(s) who handles your client’s invoices. Having a good working relationship with them can be invaluable when chasing payments.

It’s also worthwhile pondering whether clients are as valuable to you as you once thought. After all, late-paying clients aren’t assets, they’re liabilities. For those clients that do make the cut, they won’t mind you taking no prisoners when it comes to credit control. They’ll appreciate that, if you’re professional with your business affairs, the chances are that you’ll be professional with theirs, too.