Late payments – You V Client & [Statutory Rights]
The latest Federation of Small Business (FSB) research shows a majority of small firms hit by late payment as a result of COVID-19, despite only minority having terms changed, seriously stifling cash flow.
Since we started in February 2018 we have had written terms and conditions that were drafted by a legal professional. These include cancellations, late payments and others that you need to cover yourself and your business for in the unlikely event of “Force Majeure” or unforeseeable circumstances that prevent someone from fulfilling a contract.
If you have an unpaid invoice for goods or services, you are, by statutory law, you are entitled to claim interest on the commercial debt (B2B) transactions and compensation for late payment!
Why is late payment a problem?
Cash flow is the lifeblood of any business. It costs money to hire premises, pay for rates and utilities, buy materials, pay salaries and countless other overheads. With times being so hard, few businesses have the luxury of large cash reserves. Especially during the pandemic when we were hit massively by a client that thought they could pick and choose when to pay contractors. Some months we’d go weeks without payment, because of annual leave or bank holidays or them forgetting to make the payment run and finishing early.
Most businesses have to purchase materials, pay wages and overheads before they can invoice for the services they provide or sell the product that they make. Where credit terms on an invoice are exceeded and bills paid late, the business can be left in real financial difficulty through no fault of their own. It’s always best to encourage clients to pay early at the beginning to prevent any bad habits from forming later on.
Late payments – You V Client & [Statutory Rights]
With operating costs being higher than ever, there will eventually come a point where a struggling small business has exhausted every means of funding while waiting for overdue bills to be settled. When this happens, there’s a very real risk that the company will go out of business.
Cash starved small businesses can try to survive by taking more extreme measures to maintain a degree of liquidity. For example, by putting off hiring new staff or investing in new equipment at the cost of growth. Directors may even resort to more costly or risky methods of funding. Some even remortgage their homes. They could reduce staff hours to cut employment costs, but there’s a chance they could lose their best staff who need those hours. They may end up unable to pay their own suppliers and risk late payment fees or reduced credit terms.
Ultimately, too many unpaid invoices will result in even a well run, otherwise profitable small business being forced to close.
What you can do
First and foremost is to have written terms and conditions that state your payment terms. For example, we use Sage Business Cloud Accounting software and our payment terms are set to NET30 as standard for all clients. Every time an invoice is produced they state our terms and conditions, clients are directed to our website.
As soon as an invoice has exceeded your payment terms and is one day late if it’s a B2B transaction, you are entitled to statutory interest and compensation under Late Payment of Commercial Debts (Interest) Act 1998 section 5a:
- Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt)
- for a debt less than £1000, the sum of £40;
- for a debt of £1000 or more, but less than £10,000, the sum of £70;
- for a debt of £10,000 or more, the sum of £100.
Before following up on a late payment
If a client does fall behind with a payment, take a moment to consider your approach:
Be fair – Bear in mind your history and ongoing relationship with the customer. Have you worked with them for a while, and are they typically a reliable business partner? Before you start chasing invoices or get worked up, find out the reason why they haven’t paid you on time.
Check for errors – Double-check your invoice to make sure that the account information, payment amount and customers details are in order. Our Sage Business Cloud Accounting software shows read reports on invoices, check that they have received the invoice and opened it. You’d be surprised how many people ignore invoices, in hope that they miraculously disappear!
Be diligent – Make a note of what has been agreed and any correspondence with the client, then send them a copy and offer them a chance to add any details or give their version of events.
Always keep records – of correspondence, this may become evidence if you go to court.
What to do if your client still doesn’t pay despite their promises…
It’s really easy to claim money via the courts and it’s not expensive. Simply go to .gov.uk and make a Money Claim Online.
You can make a Money Claim Online if you think a person or organisation owes you money and will not pay you back. You will need to pay a small fee for this service and it cost starts from £35.00.
Before you start your Money Claim Online (MCOL) it’s a good idea to write a formal letter to the person or business you disagree with – this is called a Letter Before Action (LBA).
What to include on a letter before action
Your letter should include the following information
- Subject: “Letter Before Action”
- Your name and address
- Summary of what’s happened, why they owe you the money?
- What do you want the person/organisation to do about it?
- How much you want – the total amount of invoice plus statutory interest and compensation – see above statutory legislation.
- Deadline for a reply – usually within 14 days.
- A statement that you will commence legal proceedings if you don’t get a reply. Legal proceedings aren’t a threat, it’s merely submitting an online form above via Money Claim Online Service.
More information is available here if you wish to submit a Money Claim Online (MCOL) via gov.uk : Money Claim Online User Guide
Helpful things I use to run my business
- Sage Business Cloud Accounting
- Send invoices daily to all clients – no exceptions
- Set up automatic monthly statements (mine go out on the 1st of each month)
- Invoice reminder letter template (set up a mail merge from Sage so it populates the letter with correct information)
- Letter before action (set up a mail merge from Sage so it populates the letter with correct information)
- Rocket Lawyer – Terms and Conditions of Services – paid or free versions available