Anti-debt hacks: The ultimate get paid survival guide as an agency IT contractor
With quarterly company insolvencies reaching over 6,300 for the first time since the second quarter of 2009, limited company contractors must get to grips with what ‘aged debt’ is, and what ‘bad debt’ is, to optimise their chances of keeping both menaces at bay, writes IT recruitment agency owner Matt Collingwood, managing director at VIQU.
What is aged debt, what is bad debt?
For PSC contractors, ‘aged debt’ is money owed to the contractor by either the client or recruitment agency.
Bad debt, by contrast, occurs after repayment by a client or a recruitment agency (when credit has been extended), yet is no longer considered to be collectable. In other words, bad debt is an irrecoverable receivable.
Any contractor who extends credit to their clients must account for the possibility of bad debt, as there’s always a chance that the client’s circumstances will change, and the client won’t be able to complete payment as agreed.
My own trio of anti-debt measures
In almost a decade of trading, we’re proud to say that we’ve never had a single penny of bad debt. My sense is that this success is down to the client portfolio we work with; the solutions we put in place to manage risk, and the way we collect payments i.e. effective credit control processes.
Contractors with a limited company ought to copy that trio, or risk joining the ranks of the latest 6,300 company failures.
In the meantime, here’s my 12 top tips to keep both aged debt and bad debt at bay:
Firstly, your company needs to reduce and manage the risk of debt.
1. Agree >28 days payment terms
Payment terms usually range from 21 to 28 days for a PSC/limited company contractors working with a technology recruitment agency. Contractors direct-to-client can have similar terms.
However, if the payments terms are higher than 28 days, I would recommend pushing back on the agency (or client), and saying you cannot make more than 28 days viable. The lower the payment terms, the better you’re managing the risk and the better your cashflow.
You might want to consider doing a credit check or looking at Companies House to get an idea of whether the agency (or client) is ‘high-risk.’ If in doubt, enforce payment terms that work for you -- either seven days or payment upfront.
2. Check for (and negotiate out) ‘pay when paid’ clauses
Lots of recruitment agencies weave into their terms a clause that states that they won’t pay you -- the contractor -- until they get paid by the client. This creates risk for you.
If the agency is having financial issues, you might not get paid. So when you’re signing with an intermediary (i.e. a recruitment agency), make sure such a ‘pay when paid’ clause isn’t included.
3. Ensure a smooth timesheet approval-process is in place
If you’re using an agency’s timesheet portal, make sure the end-client sets up multiple delegates.
I recommend this because I’ve seen a client go away on holiday for two weeks, and a contractor waiting for that entire period to get approval to get paid. A relaxing time for the client was anything but for the contractor.
4. Do your ‘due diligence,’ and then take action
You can manage the risks around clients going bust by performing credit checks and doing some digging on Companies House, as I advise above. But if you’ve got the time (and I rather you suggest you should make the time with those 6,300 owners on the pile of failed businesses), look at the directors of the business.
With director searches, you’re basically looking to establish whether they have a clean record in terms of the companies they currently or previously were involved in. By this, I mean that you want to look out for directors who are ‘serial’ insolvency declarers. Businesses with directors like this are what you should be looking to avoid.
Unfortunately, some directors close a business on the Friday, and then ‘rise like a phoenix from the ashes’ the following Monday. There are regulations in place to prevent this but nonetheless this rising still occurs, often with the director fronting the exact same business, but with a slightly different name and their debts (including what’s owed to you) and liabilities wiped clean!
If you’re unfortunate enough to be providing or supplying services to such a business, you will end up having to write off this debt. So you’ll effectively wave goodbye to the money they owe you for your time and expertise.
Should you be concerned about the directors of the business you’re looking to work with (either a client or recruitment agency), you can ask for payment up front. Or you could ask for a personal guarantee against directors of the business. In the instance they do pull a ‘phoenix from the ashes’, you can pursue them personally.
5. Don’t get drawn in by big names
It’s not just small and medium-sized businesses you need to be wary of as an IT contractor, but the large, well-known, national and even historic. In fact, Wilko, LEBC Group, Tuffnells and Pittards are just some of the once well-regarded names to have entered administration of late. The contractor sector had its own high-profile business failure last month, and the reality is that more will follow.
With large companies in particular, when they go bust, it can impact a lot of small operators as invariably there will be a long supply chain. So if you want to get the cash you’re entitled to be, don’t be dazzled by a household name and end up with aged debt you have to cover – do the ‘due diligence’ outlined above, no matter how prestigious they sound.
6. Know your client invoice process back-to-front
You need to be able to understand every aspect of your client’s invoice process to avoid being paid late or not at all.
Before you start working, check with the business’s Accounts Payable department or the recruitment agency, to understand what your invoice needs to say, whether you need a Purchase Order number (PO), and where/when the invoice needs to be submitted.
You can reduce the risk of the Accounts Payable department not paying you because of a tiny error if you know the invoice process, and the required particulars, back-to-front.
Now, let’s assume it’s too late, and you need to move to recovering the debt.
7. Escalate if/when appropriate
If you’re outside of the payment terms, and working through a recruitment agency, my first piece of advice would be to never bad-mouth the agent!
Try to resolve the problem amicably.
However, if you’re getting nowhere, your very last resort should be to speak with the client about your issue. You don’t want to go against anything in the contract (which could prohibit you from going past the agent or, in effect, bad-mouthing them), but if there’s clearly been a breach in payment terms, then do it.
If you’re working with a client directly, you need to find a point of contact within the Accounts Payable department. Try to ascertain why they’re paying you late.
Only escalate to a client-side director if you’re getting nowhere.
8. Further escalation (potentially including Third Party Debt Order)
I remember working with a website development company in Birmingham that was contracting developers through us to support the build of a site for a large institute of surveyors.
Even though our client had been happy with our developers’ work during the assignment, when it came to collecting payment, at the end, the client claimed they weren’t happy with the work and wouldn’t be paying us.
We told our client that unless the payment was made, we would escalate it to their client as a potential ‘Third Party Debt Order.’ Understandably, the client didn’t want their dirty laundry aired in public and they paid within 24 hours.
Obviously, this wasn’t ideal for us; it was a last resort. However, some contractors in a sticky situation might be able to take something useful from this scenario.
9. Follow pre-action protocol
The law is on the contractor’s side in terms of getting invoices paid, but you must understand ‘pre-action protocol’ -- the process you have to go through to claim.
The first thing to do is to write a letter to the business setting out your claim. In the small number of instances where we’ve issued a letter before claim (also known as a letter before action), we’ve been paid every time. People don’t want to go to court!
10. Use a solicitor
My top tip if you’re really worried aged debt is going to turn into bad debt? Go to a so-called Magic Circle or Silver Circle law firm and request a Trainee Solicitor to send the letter before action. Their hourly rate will be far less than other solicitors, but the firm’s name on the letter’s headed paper/email will give your errant agency (or client), the impression that you’re taking the claim extremely seriously.
11. Understand your contract
If your agency does go bust and you have to write off some bad debt, it’s highly likely that your contract will be null and void, including any restrictive covenants. This means you may be able to contract directly for the client going forward.
Remember that if you’re working through a ‘phoenix rising from the ashes’-type of recruitment agency, they might contact you to say you can return to a new contract through them.
Don’t do that. Go directly to the client or find another agency to act as payroll, which usually costs between 5-10%.
12. Know when to stand down
You might choose to extend the payment terms slightly for the client or recruitment agency. But don’t be afraid to walk away. Don’t let emotion come into it. Consider everything logically, and in black and white (and ideally with time to reflect), before making any decision.
Penultimately, some cautionary tales
You can certainly inflict urgency or seriousness by pulling your services if you’re unpaid. However, do not do anything malicious or not contractually permitted. I’ve spoken to contractors who have shut down servers on a whim, or out of spite, only to have threats of claims against them for losses.
It’s not the only bad debt horror story which springs to mind. When I worked in the corporate world, a Systems Integrator client of mine went bust owing my employer a mega £350,000
In the wash, that £350,000 represented small change to my employer, but a bad debt of ‘just’ a fraction of that -- say £3,500 -- to a one-person contractor company can be the difference between paying a VAT bill, or a corporation bill to HMRC. Or not.
Lastly, the wolf at the door: know what to do if it knocks
To conclude, the sad reality of running a contractor business is that aged debt or even worse, bad debt will probably rear its ugly head at some point. Hopefully, the 12 tips here will help you mitigate the risk of either.
However, be conscious that it’s likely that aged debt and potentially bad debt will darken your door at some point -- and when it does, make sure you seek specialist legal or debt recovery advice. Remember, as a contractor, you will have liabilities outside of what you want to pay yourself (VAT bills, corporate tax and so on). To avoid being part of the Insolvency Service’s next quarterly update, make sure your company is operating in a way that protects you financially if you do end up suffering from debt sometime in the future.