Chasing unpaid invoices can be a double-edged sword. While you need the money to progress your business and pay bills, there is always a fear you may upset a client and lose future work.
Walking this tightrope is no fun at all, and things only get worse if a client refuses to make a payment or ignores your invoices.
While you may be tempted not to rock the boat in the hope a client will eventually settle their bill, the results of not chasing late payments can be extreme.
Last year, the UK Government stated that late payments cost the economy £11bn a year and shuts down 38 businesses every day. Ministers have recognised that this puts a particular strain on small businesses, leading to the launch of a consultation on measures to tackle late payments and award more powers to the Small Business Commissioner.
Further reading: Government to crackdown on late payments to small businesses and freelancers
With this in mind, how can you successfully chase late payments without upsetting the clients you rely on?
The best way to avoid having to chase unpaid invoices is by having a robust system in place to ensure they are sent out on time and contain the correct information.
By following these steps, you can save yourself time and improve your cash flow:
Late payments are not always deliberate or malicious. Most cases will simply be an oversight.
As such, a polite reminder will often be enough to prompt payment while avoiding any potential conflict.
Such reminders should be professional and brief, outlining the details of the overdue invoice, the amount owed and when it was due. You should also offer your client the opportunity to explain if they have any issues or need a fresh copy of the invoice.
If this gentle prompt doesn’t work, then it may be necessary to make a firmer approach. At that stage, you should request payment is made immediately and be clear that the situation is now urgent.
Depending on the nature of your relationship with the client, you can also consider making a phone call. The personal touch can sometimes unlock doors that formal letters or emails can’t.
If these further reminders are also ignored, it may be necessary to send a final letter or email communicating the seriousness of the situation.
If a client is still withholding payment, you may need to take more formal action. This can include discussing payment options, late payment charges, and even court action.
It’s possible your customer may be having cash flow problems, perhaps waiting for someone else to pay them before settling your invoice.
In this case, they may be able to make a partial payment rather than the full sum. Creating a payment plan could be a good way to make sure you get paid in the long run, without having to revert to legal action or endangering your relationship with the client.
Another option is to charge interest on late payments, or seek compensation for any debt recovery costs.
Under The Late Payment of Commercial Debts (Interest) Act, the statutory interest rate is eight per cent plus the Bank of England base rate.
You should write to your client to inform them of your intention to charge interest, making it clear that this interest will accrue unless the payment is settled in seven days.
It can help to inform clients upfront in your terms and conditions of the potential of such charges if payments are late.
This is the nuclear option when it comes to debt recovery, so careful consideration should be taken before pursuing a claim through the court system.
A claim form will need to be completed, outlining details of the debt. You will also need to pay an issue fee. This claim will be served on your client, who will be required to acknowledge it within 14 days and respond in full within 28.
Any claim could be subject to a defence or even counterclaim, with the decision made by the court in what is rarely a quick process. Late payments under £10,000 will be allocated to the small claims court. This process can take six to 18 months.
You may also want to consider issuing a statutory demand for payment. This is generally a last resort before initiating bankruptcy proceedings against a debtor.
Such a step can be used to attempt to recover debts of more than £750 for companies or £5,000 for individuals. It is wise to take legal advice before choosing this option as statutory demands can escalate quickly.
The secret to unlocking late payments can often be found by bringing in a third party. A neutral mediator may be able to help broker an agreement, avoiding timely and potentially costly legal action.
If this doesn’t work, you could also consider employing a debt collection agency. This will involve paying a fee to the agency, or agreeing that they will pocket a percentage of the recovered amount, but it can remove time and stress from the process.
Legal protection insurance provides expert advice and cover for the cost of defending or pursuing legal disputes, including chasing unpaid invoices.
From obtaining initial legal advice free of charge to covering solicitors’ fees, it offers the support you need every step of the way.
Qdos’ legal protection insurance provide up to £50,000 to cover the legal costs of pursuing a range of disputes, helping you to navigate your way through the tricky world of debt recovery.
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