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What Can a Small Business Do About Overdue Invoices?

Businesswoman calling to chase paymentIf you’re running a small business and don’t always get paid immediately or up front for goods or services, you might have experienced the pain of late payment. I know I have!

A survey carried out by the Federation of Small Businesses (FSB) in 2014 found that 34% of small businesses had experienced late payments from private sector clients over the past year.

For a small business, a late payment can have a serious impact, especially if it’s for a large amount. Sadly some of the worst payers are big businesses. Corporations often enforce their own payment terms, insisting on paying 60 days after receiving an invoice, or even later. Unfortunately many withhold payment even longer, for the sake of their own cash flow, disregarding the impact that might have on smaller suppliers.

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The good news is that when a payment officially becomes late, there are several things you can do to chase it up.

Working out when a payment is late

This issue is most likely to affect you if you invoice for the goods or services you offer. Assuming that’s the case, it’s always a good idea to include your payment terms, ie how many days the client has to pay, on your invoice.

However you will often find that larger clients have their own payment terms and you will generally have to abide by them. It might be worth asking corporate and public sector clients when you first invoice them what their payment terms are, so you can make a note of when you can expect them to pay.

According to the government, if you haven’t agreed otherwise, a payment from a business or public sector organisation is officially late 30 days after the goods or services were provided or the client received the invoice, whichever was later.

Once you know a payment is late

If the late-paying client is another business or a public sector organisation, rather than a private individual, you have the right to charge them interest. The statutory rate is 8% above base rate per day from the date the payment officially became late. On top of this, you can also charge a fine, or compensation, depending on the amount owed:

Invoice amount                Fine

Up to £999                          £40 per invoice

£1,000 – £9,999.99            £70 per invoice

Over £10,000.00                £100 per invoice

To work out how much a customer owes, you can use the free late payment interest calculator on the Pay on Time website. Just sign up for an account then click on ‘Basic late payment interest calculator’ in the Registered user links menu on the right-hand side.

Once you’re armed with the details of what you’re entitled to charge, you’ll be in a stronger position to chase your client for payment.

Here’s what I’d suggest:

Email your client as soon as your payment deadline passes

As soon as you believe the debt has become overdue, email the customer with a polite reminder. You can use this opportunity to check what your client’s payment terms are, if you haven’t already.

Follow up by phone

If you don’t get a response to your email, follow up with a phone call to check whether things are OK and ask when you can expect to receive payment.

If you don’t want to do this yourself, you can ask a friend or family member to do it for you and say they’re calling on behalf of your company. That can add valuable gravitas.

If you like, you can take this opportunity to mention the fine and late payment interest that you’re entitled to charge to give the client an extra push. This worked well for me, in a case where a client had stopped paying my regular invoices after being taken over by another business. The client admitted that they knew about the statutory late payment charges and agreed to settle a revised invoice for the new total immediately.

However you might want to give your client a bit more grace to pay the original amount, if you want to maintain a good relationship.

Send a letter

If the client doesn’t respond, try sending a letter by recorded delivery, so you can track whether it was received.

At this point it’s definitely worth mentioning the interest and fine you’re entitled to charge. You could offer to keep to the original charge if you receive payment by a particular date. You might also offer the option of paying in instalments to encourage dialogue.

Alternatively, if you suspect your client won’t take a letter from you seriously, you could instruct a solicitor’s practice to write to them on your behalf. I’ve used Thomas Higgins, who charge just £2 + VAT to send a late payment letter on your behalf.

Alternative approaches

If my suggestions above don’t get your customer to pay up, or if you’d like to take a different approach, here are some other ideas you could try:

Use a mediation service

If you’re struggling to get a client to respond to your prompts to pay you what they owe, you could turn to a mediator who will facilitate dialogue between you.

It’s best to use a mediator who’s registered with the Civil Mediation Council. You can find one that covers your area on the Justice.gov.uk website.

You can expect to pay around £50 to £100 per hour.

Take your client to court

You have the right to take a late-paying client to the small claims court. However note that you will usually have to pay a court fee and you may not end up getting your money back.

You can find out more at https://www.gov.uk/make-court-claim-for-money/overview.

You may find that the threat of court proceedings is enough to prompt your client to pay. Debt recovery letter-writing services like the Thomas Higgins’s also offer the option of writing a ‘letter before action’, warning of your intention to take the client to court if they don’t pay up.

Use an invoice financing service

An invoice factoring service will pay you the value of your unpaid invoices, minus a percentage. The provider will then take on the responsibility for chasing your clients for payment. This offers the benefits of getting the majority of the money into your company’s account as soon as possible and taking away the stress and hassle of chasing it. However it could have a negative impact on your relationship with your client.

Alternatively, an invoice discounting service will effectively lend you the majority of the invoice value, but leave you to chase the debt. This is a more discreet option.

Turn to a debt collection agency

Appointing a commercial debt collection agency should really be a last resort. Many charge hefty fees, which will often be charged to your client. This will almost definitely mark the end of your relationship.

If you do decide to work with a debt collection agency, make sure they’re registered with the Credit Services Association (CSA).

Government help will soon be at hand

In July 2015 the government confirmed plans to appoint a small business commissioner, whose main role will be helping to tackle the problem of late payment.

Small business minister Anna Soubry said, “Small businesses are owed £26 billion in late payments and spend millions more chasing down money they have already earned through hard work. This is simply unacceptable – it limits their growth and productivity, and can put an otherwise successful business at risk.”

The small business commissioner will:

  • provide advice and support on how to avoid and resolve disputes with larger companies
  • offer access to mediation services to sort out issues quickly without the expense of going to court
  • and investigate complaints about unfair business practices.

In the meantime, following the steps outlined above will help you chase up the money you’re owed.

Which techniques have you found most effective for chasing late payments?

Small businesses are owed £26 billion in late payments. Is yours one of them? Find out what to do. Click To Tweet

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