When your contractor limited company isn't paid on time
Contractors who don’t take action on late payments can risk their homes and livelihoods, particularly as contractor hiring freezes take hold through 2019.
Knowing your rights, and acting decisively, can make all the difference, writes Adam Home of Safe Collections, a debt recovery and credit reporting agency that specialises in helping freelancers, contractors and other small businesses.
As soon as your company’s invoice to another company becomes overdue, you have legal rights. And the clock starts ticking on the payment ‘due date.’
Your options if paid late (and when to take them)
Let’s assume you have a payment term of 14 days.
On day 15, if you’re still owed money, you can start charging interest and fees without having to:
- go to court
- hire a debt collection agency
- engage a solicitor or legal specialist.
So forget these three things at this stage (-- day 15). You simply charge interest at 8% on top of the Bank of England base rate. And to reiterate, the interest becomes due on the day after the payment due date (day 15 in our example).
But there’s more. On top of this sum, you can add a one-off fee of £40, £70, or £100 depending on the value of the invoice. This additional fee you’re adding is because your client also becomes liable for “statutory costs” that your business incurs when trying to collect what it’s owed.
Of course, charging fees and interest isn’t going to boost relationships with clients. So before going in with all guns blazing, you might want to send a polite ‘nudge’, or make a quick phone call, to see if you can get your payment sorted amicably, even though by now (day 15, and you should have been paid by day 14) you’re already a victim of late payment. When you get in touch via phone or email (check back on ContractorUK tomorrow for some tried and tested written approaches to getting what you’re owed -- now published here) out of the late-payer, remember that it doesn’t hurt to mention, in passing, that you might have to add these fees or interest to the total sum you’re invoicing them for, in the event that the matter drags on.
The Law is on Your Side
First and foremost, know your rights. Late payment legislation was introduced in 1998, allowing you to charge the interest. It was supplemented in 2002 and toughened up in March 2013, in the shape of the ‘The Late Payment of Commercial Debts Regulations 2013.’
So for any B2B invoice raised after March 16th 2013, this newest legislation applies. It allows for you (the contractor, or unpaid party) to recover any extra collection costs that you incur.
Don’t be afraid to levy these and politely chase. Yes, making demands can be risky if you need to maintain positive relations. But you can firmly and politely ask for what’s owed first, without risking your good relations and the commercial relationship.
In order to charge the daily interest (which the 1998 legislation introduced), you’ll need to calculate what you’re owed.
As an example, let’s assume that the Bank of England base rate is currently 0.5%. That means you can charge 8.5% in late payment interest. So if a business owes you £1,000, the annual statutory interest is £85 (i.e.£1,000 x 0.085).
Then, simply divide this by 365 to ascertain the daily interest amount that is accruing on your overdue invoice.
Assuming your client doesn’t pay straight away, you might need to add this to your invoice, but then also remember to recalculate it -- if you have to resend the invoice again later.
Various websites and our free iOS app will calculate the amount due for you. Remember to charge interest from the day after your payment ‘due date.’ Getting this wrong can sometimes put the back up of the late-paying party and initiate an unhelpful ‘tit for tat’ dynamic between you and them.
As a contractor, you might be confused about who to approach with your demand for late payment interest and fees, especially if you have a business relationship with more than one party.
It’s common for contractors to work through an agency or intermediary, rather than with the end-client directly. And if that describes your situation, you should always send invoices and communications about late payment fees to the agency for payment.
Likewise, actual demands should go to the same place -- not to the end client.
Why? Well, etiquette suggests that it’s bad form to involve your client if they aren’t paying the bills directly. In practical terms, they might not be able to do much about it.
But think of it from your own perspective too. Nobody wants a payment dispute hanging over their work, so being a contractor actually puts you in a good position in being able to separate the two.
When to Disclose Payment Issues
There are a couple of exceptions to this rule of separating payment from the client:
- If your client has a rapport with the agency, and your invoice is creeping further and further overdue, a quiet word with someone in the business might get things moving.
- If you’ve not been paid for a while and you have any serious concerns about the agency’s intention or ability to pay, a discreet word with the end-client might put your mind at rest. We’ll look at this in more detail later on in this article.
Remember: as a contractor, you are usually paid by the contracted party, which is the agency in this example. That’s the golden rule.
Be careful before making demands of the wrong company and, potentially, souring future relationships or contracting opportunities. Money is always a touchy subject, particularly if you ask the wrong person to pay!
Doing Your Due Diligence
When our collections team deals with late payment issues for contractors, we frequently see payment problems involving dodgy agencies who can’t, or won’t, pay up.
Ultimately, it’s up to each contractor to ensure that the agency’s finances are sound.
Some contractors come unstuck when their agency -- which initially looked pretty wholesome -- runs into financial difficulties down the line. Occasionally, agencies get payment from your client, but fail to release money to you. Unfortunately, late payment fees and interest will do little to force an agency to pay, if they’re simply unable to afford it.
If you don’t know anyone with experience of the agency you’re thinking of working through, consider running a ‘Credit Check’ on them. Note though, newly incorporated agencies will lack a credit record, and will therefore be rated ‘zero’. Of course, without them having a trading history, you’re going to find it difficult to ascertain whether your chosen agency is reliable.
Bear in mind; credit-checking an agency won’t protect you in the long-term. However it’s a good way to weed out poor quality agencies at the start and it can help you take steps to limit your financial exposure, with shorter payment terms or weekly billing, instead of monthly invoicing.
It’s impossible to predict ‘dodgy debtors’ with any consistency, but there are some warning signs that get our spidey-senses tingling every time.
Contractors should be particularly wary of:
- Companies that are newly incorporated or those that are owned or directed by individuals with a history of lots of short-lived, limited entities in a similar field.
- Companies that pay quickly at first, but slow down on payments over time
- Payments that repeatedly fail to come through towards the end of your contract. This could mean that the agency is hanging onto the cash prior to collapse
- Sudden or repeated changes in personnel (even those staff not directly responsible for payments)
- Confusion within the business caused by people leaving without a handover or notice period
- Failure to meet prearranged payment terms, like staggered payments
- Any differences between what the client says they’ve paid and what the agency says they’ve received.
If you have doubts, you could consider using a third party escrow service to handle payments. Bear in mind though, escrow doesn’t come cheap. Nonetheless, it might be money well-spent in some cases as it can safeguard relationships where big works and large fees are involved.
Plan of Action
Armed with the above information, it’s wise to have a vague idea of when and how to chase what you’re owned. In general, it’s best to chase as soon as your invoice goes overdue. Although many contractors we know like to gradually ramp up the intensity, rather than going straight in with fees and demands on day 15 (as per the earlier example).
If you’re reading this and you’re on a retainer, you might want to pause work if you’ve not received up-front payments. Retainers are a special case when it comes to payments; we’ve covered them in more detail here.
After Sending the Invoice
It’s not a good idea to pressure the client before your payment date. That said, it is wise to contact them about a week after sending the invoice to ask, informally, whether they have received the invoice and to check everything is in order.
This can avoid payment delays after the ‘due date,’ should the client suddenly realise that the invoice is lost in the post.
Time to Put it in Writing
Your ‘due date’ has come and gone. You’ve sent friendly reminders and given nudges. So it’s now time to bring out ‘the big guns.’ Each of which gets a little bit ‘bigger’ at seven days overdue; 14 days overdue and more than 15 days overdue. What to say in three such letters is a precise science. Your words can spell the difference between getting what you’re due and inflaming the situation -- or simply never getting paid at all. Check back on ContractorUK tomorrow for these three, including the vital ‘Letter Before Action’ – also known as the ‘Final Demand.’
All the letters will contain notes to help with practical issues like phraseology. We'll also offer alternative wording to give contractors more leverage. But don't skim the above, because each letter should be read with the guidance given here -- to optimise your chances of recovering what your business is rightfully owed.