These days, online banking is rapidly making redundant the old chestnut about the cheque being in the post. But there are still many excuses that clients can – and do – come up with in a bid to postpone their cash reaching your account.
Luckily, there are clear guidelines about what a business can do if a creditor is late paying for goods or services. These are set out in late payment legislation, which was updated in March 2013. This legislation is very handy to know about, but as you probably won’t be keen to threaten legal action – particularly with regular clients – it’s good to try to avoid late payment in the first place by taking a few simple steps:
The best policy is to have a clear contract to begin with, setting out agreed credit terms. Many businesses choose to implement a 30-day timeframe for payment, but some opt for 14 and some as little as seven, so it’s advisable to make this clear when the goods are bought or the services are commissioned.
When the work is completed to the satisfaction of both parties, reiterate the agreed credit terms by including the following in small print at the bottom of your invoice:
Payment is due within XX days. I understand and will exercise my statutory right to interest and compensation for debt recovery costs under the late payment legislation if I am not paid according to agreed credit terms.
Don’t worry if you haven’t set out these terms as you are still protected by law. Under the revised legislation, the default period is 30 days for a business-to-business transaction if no terms are agreed. Where terms are agreed, they must not exceed 60 days unless both parties agree. For public sector payments, payments must be made within 30 days of receiving the invoice.
Businesses are entitled to interest from clients who don’t pay within the legal timeframe, as well as compensation for things such as using a debt recovery agency. If the debt is less than £1,000, compensation starts at £40, rising to £100 for outstanding payments over £10,000. In addition, statutory interest of 8% plus the current Bank of England base rate can be added to the invoice. If you decide to add interest, you will have to issue a new invoice setting this out clearly. Many businesses, however, prefer to issue a friendly reminder before taking this step, in order to maintain a good business relationship.
If the client still doesn’t pay, you can make a claim in the small claims court. You might or might not recover the payment and might be left with court costs. Another option is mediation, where a neutral party tries to help you and the client reach an agreement.
Unfortunately, all of this takes time. At best you can expect to spend a couple of hours each week checking which clients have paid and chasing late payers, whilst the worst-case scenario could be a time-consuming and frustrating court case. A good solution is to let an invoice factoring broker take care of your invoices for you, allowing you to concentrate on your business. Known as invoice financing, this option sees a broker checking the market for the best deal from an invoice funder, who will then pay your business up to 90% of the invoice value. The funder will then chase up payment with your client, taking awkward conversations out of your hands.
For more information on invoice financing, call Simply Factoring Brokers on 0333 772 1558 and see how we can help your business.