How to deal with late payers

It’s hard enough running a business without dealing with late payments or, worse, pursuing debt recovery. An estimated third of all small business invoices are paid late every year. When and if this happens, it’s a real hammer blow to business owners, both commercially and personally.

Before we get down to the practical aspects of dealing with late payments, let’s acknowledge the impact on business owners like you.

Personal and commercial impact

As accountants who encourage, advise and steer many fledgling and established businesses, we see the distressing and damaging effects that bad debt has on businesses and the people who own and run them. It’s not a pleasant experience for anyone involved.

Even a small debt can devastate a business, especially those running on tight margins or needing to manage cash flow to pay suppliers, staff and business running costs.

There’s also the personal nature of the unfairness and associated disrespect that comes from not being paid for your hard work. It’s stressful and time-consuming to deal with and not what you went into business for!

Every business will experience late payers and bad debt

There are varying degrees, but the sad fact is that you will most likely have to deal with late payments and/or bad debt at some point.

Even if you’re not the type of person who’s comfortable asking for money (including a surprisingly high number of business people) or dealing with conflict, you can protect yourself from a lot of the stress and personal hurt of dealing with late payers. Being forewarned and forearmed by putting robust procedures in place that you apply without exception is your best defence.

What can you do to protect yourself from bad debt?

Like everything in life, preparation is everything. You’ll encounter fewer problems if you’ve thought about the possibility of not being paid for your work and taken a few simple steps before you even send out your first invoice:

You should have clear written terms of business, setting out your rights and obligations as a supplier of goods and services.
You should have a written contract that says what you’ll supply, by when and for what cost. This can include your cost proposal and, by accepting the proposed costs, your customer accepts your terms and conditions.
If you’re providing a service rather than goods, it’s also an idea to agree to a down payment or deposit before work starts, particularly for services like professional and creative services where your products are intellectual rather than physical goods. Also ask for a down payment if you’re going to have to buy parts, materials and equipment specifically for use on that job. You could also negotiate stage payments for longer projects or when more materials are needed.

Get paid along the way:

Only start the work once the deposit invoice is paid. Only continue work to the next stage, as agreed payments are paid.
The invoice needs to state the customer’s name/business name and either private or business address. It should also state your name, business address, VAT number if you’re VAT registered, and any purchase order number.
The invoice should describe the work or goods supplied, and the agreed price (or payment due) along with a clearly stated due date and how payment should be made (encourage electronic transfer payments).
Include a statement of penalties for late payment.
If you’ve not received payment up to 48 hours before the due date, it’s a good idea to send out a polite reminder, especially if you’ve offered an early payment incentive.

If payment is late:

Act now!: Don’t let things drift. Invoices are genuinely missed or forgotten, but ignoring the situation and hoping for the best will not get you paid!
Courtesy call: As hard as it is to ask for money, start chasing straight away. Make a polite and assertive courtesy call and ask when you can expect payment.
Written reminder: If that call doesn’t have the desired impact, send out a written reminder emphasising your penalties for late payment, including your right to charge interest and late payment fees.
Be flexible, up to a point: Be prepared to be flexible, but only agree to stage payments if you’re confident your customer can and will pay, and don’t agree to long, drawn-out payment plans.
Be polite, professional and persistent: As hard as it might be, try to keep your personal feelings out of any discussions or negotiations, but follow through on your stated penalties for late or non-payment.
Final informal measures: If payment is still outstanding, contact the customer in writing to say you will be exercising your statutory right to claim interest at 8% above the Bank of England base rate and compensation for the debt recovery costs under late payment legislation.

https://www.gov.uk/late-commercial-payments-interest-debt-recovery

Cease supply:

Stop supplying further goods until you receive what you are owed. If your product is important to the client’s business, they will be more inclined to pay. Don’t be fobbed off with promises of further work!

If all informal efforts to recover the debt have failed, your option is to pursue official debt recovery. However, if the company concerned is insolvent or has no available funds, then further action is unlikely to succeed.

Taking formal action

The first step of taking things to a more formal stage can include sending your client an official letter called a Late Payment Demand (LPD) letter, also known as a Letter Before Action (LBA).

A letter can be sent when attempts to collect payment have been unsuccessful and more serious action is needed.

The letter can be sent by you, or, if you feel it would carry more weight, by a solicitor. Check out comparable fees as some solicitors offer discounted rates for small businesses or members of business groups like the Federation of Small Business.

https://www.fsb.org.uk

You can find lots of templates online, and it’s a good idea to familiarise yourself with the format even if you’re going to ask a solicitor to draw the letter up and issue it on your behalf.

LPD/LBA letters should include the following information:

Contact information: Name and address of the debtor and the sender.
Amount owed: Total amount outstanding, including any interest or additional charges.
Due date: The date by which payment is due.
Consequences: Clearly stated consequences of not paying, such as legal action.
Payment instructions: How to pay, such as banking details.
Previous attempts: References (including dates) to any previous payment reminders or attempts to collect payment. Make it your standard practice to document everything, even the dates and brief details of phone calls, as you never know when this information might be needed.
Explanation: Details of why payment is outstanding and in breach of the payment terms
Signature: Sender’s signature

Have the courage of your convictions

Of course, you must be prepared to follow through with any further sanctions you make, such as passing the debt on to a debt recovery or factoring agency and, ultimately, legal action.

Debt recovery and factoring agencies

Before you get to the point of engaging a solicitor, you can talk to a debt recovery agency that will attempt to recover your outstanding money on your behalf. They won’t take on debt that’s in legal dispute, and it’s not a cheap option, with agencies typically charging up to 10% of the value of the debt, plus their costs.

Factoring your invoices

Factoring is a way of easing your cash flow for a fee. Factoring agencies pay you the value of your invoice (less a hefty fee) and then recover the invoiced amount from your client. They won’t take on overdue payments or clients who have a history of late payment. Bear in mind, however, that some clients don’t like dealing with factoring agencies and it could give the impression that you don’t trust them to pay.

Consider mediation

The next steps could include mediation, where an impartial professional helps both parties to work out a payment agreement. Mediation is quicker and cheaper than going to court and will be specified as a preferred option if you make a court claim for less than £10,000 owed.

Court action

If all other steps to recover your money fail, you have the option of formal proceedings.

Bankruptcy: You have the option of applying to make someone bankrupt if you’re owed £5,000 or more by an individual, including a sole trader or partner.
Winding up order: You can also apply for a company winding up order (insolvency order) if you are owed more than £750.

Both options are the ultimate steps you can take, involving court proceedings and heavier legal costs, so you need to think carefully about whether it is worth the cost, time and stress involved.