How to get paid on time as a contractor business owner
Making sure you get paid on time is important for your business operations and cashflow.
And it’s an importance that surely increases with a cost of living crisis and a 27-year high in inflation, putting pressure on your bottom line, writes Vicki Bracey, a manager at free digital business account provider to limited companies, Mettle.
So how to set up your invoices, when to submit them and how to clearly state your payment terms, are all areas I will advise on here, exclusively for ContractorUK, to ensure your contractor business gets paid on time.
If you’re new to contracting, remember this. You get paid immediately if you run a shop and take payments using a card machine or cash. But if you rely on invoices, it can often be stressful waiting for the payment to come through – from parties you might never meet.
If you’re an old hand at contracting, unfortunately you’re not immune to late payment either. According to The Small Business Commissioner (SBC), almost seven in 10 small business owners faced serious problems with late payments during the pandemic. Worse still, perhaps, more than 26% of tiny traders say late payments have turned “more frequent” since the cost of living crisis struck.
Here are some top tips to help make sure you’re paid on time…
1. Tell customers how and when they need to pay from the start
You need to make it clear to all clients upfront what your payment terms are.
As the SBC rightly points out, your contractor payment terms need to state when the payment for the services/goods must be settled by. This key detail can be put on the invoice.
Officially, the payment terms begin when the invoice has been received and accepted. If payment isn’t received on the agreed date, or before that date, the payment is ‘late’. In that case, late payment charges can be applied.
Payment terms usually include:
- When you expect to be paid in full. Whether that’s on receipt of the invoice, within 30 days or on a specific date.
- Any requirements for a deposit payment upfront.
- How you want to be paid e.g. by bank transfer or other means.
It’s recommended that you share these three details in writing and ask that your client acknowledges them.
2. Send invoices out quickly
It’s easy to get behind on your invoicing when you’re busy running your business and jumping from one contract to the next!
But clients will wait for an invoice to confirm payment details before they make any payments.
As mentioned already, your payment terms won’t start until an invoice has been received. This means that the quicker you send your invoices, the quicker you’re likely to get paid!
Incidentally, users of our app can create invoices on the go – ideal for contractors who are getting back to roaming or contracting overseas now covid restrictions have eased.
3. Make sure your invoice is clear and accurate
Questions or disputes about an invoice can cause delays in getting paid.
It’s important your invoice is accurate and includes all of your business details as well as a breakdown of the products/services your customer is paying for.
If in doubt, you can check the government’s website which has a list of requirements for invoicing and taking payments.
Remember that if you charge VAT, you need to split it correctly on your invoice.
4. Follow up promptly on overdue invoices
Chasing a customer for payment can sometimes be difficult, but as a business owner you need to be firm but friendly when reminding someone to pay the money that’s due.
Interestingly, the SBC offers a timeline for when the out-of-pocket should chase overdue invoices.
Generally though, the longer you leave an invoice unpaid, the more difficult it can be to follow up. Make sure you remind your clients as soon as the payment is overdue.
5. Late payments and what to do about them
Reassuringly, if you don’t set payment terms, your client has to pay you within 30 days. This was reduced from 60 days after an update to the new Prompt Payment Code that came into effect in 2021.
If your client doesn’t pay you, then be aware you can make a statutory demand to ask for the payment.
But there are other ways to ask for your money back, rather than sending a statutory demand, such as mediation or court action.
You also have the right to charge interest for any late payments. This is called ‘statutory interest’ and is 8% plus the Bank of England base rate for business-to-business transactions. However, keep in mind that you cannot claim statutory interest if there’s a different rate of interest in your payment contract with your client, so do check the small print.
Hopefully, this guide will help you with getting paid on time as a contractor business-owner, where you are direct-to-client. The key things you should be aware of are setting clients' expectations with clear payment terms and dates, invoicing, knowing how to follow up correctly, and charging interest. Once you put these into place -- and consider there is an actually an upside to the BoE base rate increasing as it is, dealing with late payments should be much less of a struggle. Good luck contractors!