Limiting your late payment risk in the pandemic: a contractor's cash flow covid-survival guide
There’s no magic bullet for avoiding credit risk as a limited company contractor while the covid-19 pandemic continues to rear its ugly head, writes Adam Home of debt recovery specialists Safe Collections. The economic conditions are just too volatile.
But don’t just take my word for it. Approaching a hefty two-thirds of small businesses have suffered an increase in late payments during the coronavirus pandemic, according to a FSB study. And that’s hardly surprising when you consider that there is a cash flow crisis which is predicted by the Bank of England to eventually floor us for an unfathomable £200billion deficit.
The covid economy isn’t just for Christmas
Put simply, frighteningly large numbers of businesses are struggling to pay their bills, which translates into credit risk being part and parcel of the new covid economy. And while the virus itself appears to be on the backfoot (on the much-needed good news of two vaccinations hurtling towards Spring 2021), the economy it will leave behind is here for the foreseeable.
So it should be both surprising and reassuring to contractors worried about whether their next gig is actually going to pay out or not, that there are practical steps that such limited company workers can take to minimise their level of risk which they take on.
Some of this boils down to sound credit control practices. In other respects, it’s a case of leveraging certain working practices which favour contractors when it comes to getting paid -- while avoiding those that don’t.
Credit control 101
If ever there was a time to brush up on the basic principles of sound credit control, it’s now. All those things you were told to do when you started contracting but have gradually let slip as the years have passed, now is the time to get back to that by-the-book, safety-first approach.
I’m talking about things like only going forward for opportunities from reputable and credit-worthy agencies and clients. Just one of those ‘must-dos’ can be highlighted by asking:
Do you research and get a credit report done, before you sign a contract?
From our perspective, we rate Experian as an excellent online credit-checking service -- but there are plenty of other good choices.
If the report digs up a long history of debt, defaults on payments, CCJs and so on, just don’t sign up for the work. It’s as simple as that. You’d be better off spending your time looking for another gig with a more reliable client than risking doing a load of work you might never get paid for. Now is probably not the time to take any risks with newly incorporated companies either (sorry start-ups). The aim is to mitigate risk, and to do that, you should stick with known quantities.
Contractors, stay opted in to the Agency Regs!
As well as a global pandemic, contractors are having to face a lot of upheaval around IR35 right now, and there is a lot of debate about the merits of opting in or out of the Agency Conduct Regulations in relation to that. That’s a discussion for another time, another article. On the present topic of credit risk, there are clear advantages to staying opted in to the regulations.
This is because Section 12 of the regulations extends a number of protections to contractors with regards to getting paid by agencies.
This includes 12(a), which clearly spells out that agencies cannot use the excuse of not getting paid by the end client / hirer to withhold payment from contractors. In other words, if you are opted in to the regulations, the agency takes on more of the credit risk, acting as a buffer between the contractor and the financial circumstances of the end-client.
Caveats, clauses and caution
The only caveat to this is that the regulations don’t offer any protection if it turns out to be the agency who cannot pay you, perhaps because none of their clients have paid them. That comes back to getting your ‘due diligence’ right. Hence our advice, above, to reintroduce yourself to trusty old credit reports.
If you do opt out of the regulations, but getting your money this side of Christmas interests you, then I strongly recommend you avoid “pay when paid” clauses.
We completely get that for some contractors, the protections offered by the Agency Regulations won’t be enough to outweigh the downsides, not least the extra obstacles the regs can put in the way of actually finding work. But from a credit control perspective, if you do choose to opt out, we would urge caution, particularly around “pay when paid” clauses.
These clauses in effect do the exact opposite of what section 12(a) of the Agency Regs does - they pass on the commercial risk of non-payment from the agency to the contractor! Then the problem is that you are relying on how thorough the agency is in carrying out background checks on the client.
In our experience, if they’ve agreed to a “pay when paid” clause, the likelihood is the agency won’t be very thorough at all (sorry agencies). The simple truth of it is, they have less incentive to be thorough -- if the client doesn’t pay, they lose their margin while you lose your entire fee.
Keep a close eye on payments (and play hard ball if pushed)
Another staple of good credit control that is all-the-more important in the pandemic-coloured circumstances is keeping a very tight rein on your payment terms. This starts with negotiating hard, and accepting only well-worded and adequately safeguarded contracts (sorry agency/client HR and legal/compliance teams). Tied to this, contractors should make sure there is an unambiguous termination clause present, with a minimal notice period, particularly in relation to non-payment.
Next, it is a case of keeping track of when payments are coming in.
Don’t hesitate to trigger a termination clause if a client becomes persistently late and you feel the risk of non-payment rising. It is better to lose out on one invoice than to end up with a handful that go unpaid because you decided to give them the benefit of the doubt!
ABC: Agency Buffer Counts
Finally, don’t be in any doubt about the merits of working through an agency, whether you are opted in to the regs or not. The potential additional protection you get if the end-client is declared insolvent is not to be sniffed out and really counts.
As we explained in this previous article exclusively for ContractorUK, the temporary measures currently in place protecting firms from insolvency proceedings for coronavirus-related financial issues are actually hampering anyone who is owed money. As well as ruling out the filing of winding-up petitions until the spring (at the very earliest), the protections prevent contractors from terminating contracts for non-payment of fees.
This is potentially a really damaging measure, tying contractors into continuing to work for a client even if there is a high risk of them not getting paid because the business is insolvent. However, if you are contracted via an agency, there is likely to be a get-out clause so you can leave the end-user to their financial woes (sorry engagers). In this instance, it is the agency which is contractually obliged to continue to provide a service to the insolvent client, while you as the contractor are free to terminate your contract with the agency via the normal channels.
Final thoughts (includes a fifth apology)
The practical steps outlined above for mitigating credit risk during the pandemic really could make all the difference between your contractor business never going out of pocket this winter, and your contractor business becoming one of our clients – which sounds great for us, but (sorry contractors) much less great for you.