A guide for freelancers and small businesses on chasing late payments

Authored by Emma Cossey.
6 min read
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One of the joys of working for yourself is the ability to make your own hours, but it’s no fun if these are spent chasing late payments. Here are some tips to help you prevent late payments, and some guidance about how to deal with clients who pay late.

One of the joys of working for yourself is the ability to make your own hours, but it’s no fun if these are spent chasing late payments. This activity is time-consuming, stressful and costly. It’s not just a case of the time you spend chasing it, but the impact it could have on your cash flow.

In fact, according to a recent report by Bacs Payment Schemes (external link) (the Direct Debit company), SMEs are owed £39.4bn as a result of late payments. Last year, that number was £30bn (external link). These amounts might be seem eye-watering, but as anybody who works for themselves or owns their own business knows, even at a much smaller scale, late payments  can put a great deal of strain on a business.

There are ways you can prevent some late payments. Below are some tips to help you reduce the risk, and some guidance about how to deal with clients who pay late.

Before you start working together

One of the best practices to adopt when you’ve agreed to work with a client, is to send over your Terms and Conditions for their approval. This doesn’t need to be a long document. In fact, the more succinct the better, as you’re more likely to get it read and approved quicker. Email them over and ask that they reply back confirming they’re happy with it before you commence work. Your Terms and Conditions should set the tone for what they expect from you, and what you expect from them.

Terms and Conditions should include:

  • Notice period
  • Service Level Agreements/Key Performance Indicators
  • When and how you invoice
  • Revision limits – these will prevent repeated demands for changes to the work (and help focus the client’s mind on the project).
  • What your expected payment period is and details about any late payment fees, early payment discounts or part payment terms.

The last item on that list is important to consider as these terms could increase the payment speed of your clients, or at least cover your costs if they do pay late.

Late Payment Fees

Late Payment fees are penalty fees that are charged to a client if they do not pay within the agreed time limit. In accordance with the Late Payment of Commercial Debts Regulations 2002 (external link), you can charge £40, £70 or £100 depending on the size of the invoice (less than £1,000, less than £10,000 and above £10,000, respectively). This can be charged in addition to the interest payable at 8 per cent over Bank of England base rate.

Early Payment Discounts

Early payment discounts incentivise clients to pay you on time. You can offer a small percentage discount, say 4-5%, which they will get discounted from future invoices as a credit or simply taken off their bill. Not only is it a great way to encourage speedy payment and maintain your cash flow, but it could also lead to a more long-term client relationship.

Part Payment Terms

Depending on the project, you may want to ask for some of the payment up front. This is particularly common with graphic designers, website designers and consultants asking for 50% on average up front, although it is becoming common for other creative freelancers, such as copywriters to do so too.

Top tips for invoicing

Invoicing at the same time each month is likely to increase your chances of getting paid on time. You may want to consider what options you’re offering for payment too. If clients are able to pay by bank transfer or Paypal, it makes it easier for some companies to make quick payment. If you still accept cheques, consider adding a fee, as paying in a cheque requires extra time from your schedule when you could be working.

If you’re concerned about a client, consider invoicing weekly rather than monthly. That way, they have a shorter period of time to pay and if they do pay late you can charge a late payment fee on each weekly invoice rather than one monthly one and reduce the risk you will be out of pocket.

Chasing late payments

While the previous steps will have reduced the number of late payments you’ll have to deal with, there will inevitably still be one or two. When faced with a situation where a client hasn’t paid after 30 days, you can take the following steps.

  • Send them a reminder email, informing them of the fee they have now incurred and encouraging them to pay
  • If they still haven’t paid after a further 30 days, put all further work on hold until a payment is received.
  • Use the London Freelance calculator (external link) to work out how much interest you need to charge on what they owe you 
  • If they still haven’t paid, you can instruct a lawyer to send your client a letter. Alternatively, look at a freelance membership group like PCG who offer a variety of benefits for freelancers including debt collection (without having to pay a hefty fee).
  • If they’re struggling to pay up as they can’t afford it, consider a payment scheme if you believe they will pay the full amount (with interest) over a longer period of time.
  • Finally, as a last resort (and you will probably have to accept the relationship will have seriously broken down by this point), if they still refuse to pay, you can take the dispute to a small claims court. There’s a great guide on the small claims court process on Love Money (external link).

Am I covered?

It’s also worth considering WHY they’re not paying you. If the client is withholding payment because they’re unhappy with your service or claim that you haven’t finished the project, then your Professional Indemnity insurance policy may cover you if you have been negligent. Depending on your policy, your insurer could help with anything from assistance if they refuse to pay through to defending a claim if they decide to take you to court instead. If you don’t yet have this cover in place, then get the ball rolling today with a professional indemnity quote and details of the right level of indemnity for your SME.

Obviously, it’s better to attempt to find a solution before you reach this stage. If the relationship is still amicable, it may be worth revisiting the original brief or contract to ensure you’ve both fulfilled your obligations. If you’re keen to keep your working relationship, then you may want to offer to put in some extra work as a gesture of goodwill, but make sure your client doesn’t use this to take advantage of you. Again, it’s worth checking your policy here to see if it can help prevent you being out of pocket.

There’s a variety of reasons why clients may be late in paying, but taking a proactive approach and ensuring you’re aware of the risks can save you time and stress later on.

Read more of our tips for freelancers.

At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.

Emma Cossey

Frustrated by the lack of clear, actionable information available to freelancers, Emma Cossey started The Freelance Lifestyle blog. She has created a community to enourage and support those starting off on their freelance careers. Cossey is based in Bracknell, where she provides freelance business coaching and, social media consultancy. Her passion is helping freelancers and entrepreneurs up their social media game, when time is limited. If you're interested, check out her YouTube Channel or take one of her Freelance's Teabreak podcasts with you.