Getting paid late, or not getting paid at all. Perhaps the biggest and most damaging burden of being self-employed. Too many are victims of the UK’s poor payment culture towards the smallest businesses.
With the much-anticipated Small Business Commissioner set to come into action later this year, there is light on the horizon – more on this later in the article.
The media has begun to take a bit of notice of late payment (albeit not towards the self-employed). Take, for instance, the response from national news outlets this time last year to a leading supermarket admitting to knowingly delaying payments to its suppliers. The media was quick to castigate that particular business – which led to legal action and the then Small Business Minister Anna Soubry criticising the company.
Yet this isn’t making a difference. Small businesses and the self-employed still have little power to resolve disputes with larger clients or customers. The balance of power in such disputes will always favour the larger party, at least until we see the Commissioner in action.
Costs of late payment
Dealing with companies that pay late is still one of the biggest challenges facing the self-employed. IPSE research shows that almost three-quarters of disputes that self-employed workers have had with clients were because of late payment. And, according to the UK’s payment scheme for banks, Bacs Payment Schemes Limited (BACS), £32.4 billion was owed to SMEs in late payments in 2015. It’s a startling figure.
If paid late by a client, a self-employed person often cannot afford to resort to court action, either because of the expense or the reputational damage it would cause. And although commercial negotiation is possible, the reality is that this doesn’t work either. All too often the freelancer will just have to ‘let that invoice go’.
IPSE research shows that almost three-quarters of disputes that self-employed workers have had with clients were because of late payment
Of course, being paid late isn’t just a financial cost – it’s a personal one too. The last thing you need is to spend hours a week chasing unpaid invoices from clients. It can cause a huge amount of stress. Not every small business has large reserves of cash, and a steady income is needed to keep any business afloat. The emotional burden is heavy, as some freelancers rely on being paid on time to cover their month’s rent – or even put dinner on the table.
Claire Brown of Metamorfosis Ltd, IPSE member
Case study 2005/06
“At the start of my interim career I was engaged to deliver a project for a boutique consultancy at a high street retailer. After an initial successful project completed, I was asked to return a few months later. I had a good relationship with the consultancy and wasn’t too concerned seven months into the second project when my invoices covering March were not paid within 30 days. Payments had previously been prompt and I therefore accepted the initial response, that payment would be along in a few days.
“I carried on working and weeks passed. On 27thApril the consultancy owner emailed to advise that he intended to ask the client if I could bill them directly from 1st April. Later that week I learnt the consultancy had gone into administration due to cash flow problems. The client did contract me directly; however, this took time to agree and implement. I received no payment at all between 31st March and 3rd July. Ultimately, I lost all fees and expenses for the month of March, heavily compromising my own cash flow. After this, I learnt to include a payment due date on my invoices.”
What to do when late payment happens
You’ve been paid late so what are your options?
It’s important to make clear from the outset when you expect payment to be made. You cannot hope for your clients or customers to pay on time if they don’t know what the timescale is, so make sure it is included in your contract terms.
Be as clear as possible in all your communication with the client on your payment details. Double-check that you always include your details on your invoices and that they are clear and obvious.
Make sure that your terms and conditions are contained in your contract with clients, and that they are prominently displayed on invoices.
You may also consider performing a credit check before you decide on payment terms (there are plenty of websites for this, including Experian) – does your potential client or customer have a history of paying late? If so, it may be best to look elsewhere.
And if you receive no payment?
Worse than being paid late is receiving no payment at all. So, what to do when this happens?
It’s best to start with the least damaging route: reference what’s in your contract to the client. In the contract, you should always state the payment terms, such as how much you are to get paid and when. You should also state the late fees to be charged if the client fails to pay within your timeframe.
Send a certified letter to the client to make sure the invoice and letter are received. Also, let them know that you’re considering taking this matter to court.
If all options have been exhausted, and you have to fight for your money every time you complete a project, let that client go. Sometimes it’s best to be the one to walk away from a client that just isn’t reliable – it can be too much of a personal cost.
Other preventative measures:
Get your contract reviewed
Contracts are binding legal agreements between two parties and are the best way to protect yourself as a self-employed person when undertaking work for a client. It’s where you can lay out how much and when you wish to be paid. It’s also where you can add an interest rate charge for every day payment is late (past the 30 days). A vocal agreement will only leave the door open to expensive misunderstandings.
It’s definitely worth going the extra mile here and employing a professional to review your contract.
Scope creep is when the original scope of the project begins to drift and the client starts asking for things that weren’t in the original brief. This is usually OK, as long as the client understands the impact in terms of time, money and quality. If not, you may risk not receiving payment for extra pieces of work.
This situation is relatively straightforward to deal with if handled with care. Always be aware of any substantial changes to the brief you originally agreed. Raise it early on and offer the client a series of choices. For example, you could say: “To deliver this change, we can either add another month to the schedule or increase the budget by £2,000, which would allow me to hire an assistant and deliver it within the original timeframe.”
The key here is to provide a win-win situation, where you help the client solve their problem without playing down your worth. It’s essential to record the new project agreement in writing and update your contract or purchase order where necessary.
The law on payment terms
Unless you agree a payment date, the customer must pay you within 30 days of getting your invoice or the goods or service.
You can use a statutory demand to formally request payment of what you’re owed.
You have the right to charge interest for late payment, but you can choose not to.
Visit the government website for more: https://www.gov.uk/invoicing-and-taking-payment-from-customers/payment-obligations
What can IPSE do?
IPSE is here to help too. We and our partners provide practical advice on how to prevent you from falling victim to late payment. Our business interruption services provide compensation to members paid late if the client’s business falls into debt, or if the agency breaks the contractual agreement.
We also offer a contract review service that provides you with a detailed report offering any appropriate amendments and improvements to the contract wording, as well as considering the day-to-day working practices of the engagement.
Visit our website for more information.
The Small Business Commissioner’s process for handling complaints
The Government acted on IPSE’s call for a Small Business Commissioner in its Enterprise Bill in 2015. One of the Commissioner’s key responsibilities will be dealing with companies that pay late.
The Commissioner will be given the power to name and shame companies which persistently pay late. It’s essential he or she uses this power to drive real culture change among these companies, so the self-employed can get on with work without the worry of late payment or non-payment hanging over their heads.
What do we think?
Time limit for complaints
We have to assume that initially there may be a low level of knowledge of the Commissioner’s existence. Government must bring in a longer interim time limit of 18 months for the first year after the Commissioner is in place. This then would reduce to 12 months once the Government and business groups successfully raised awareness among small and large businesses.
When someone makes a complaint to the Commissioner, it must be made clear that the complaint will be treated confidentially and that details will not be made public unless the individual specifies otherwise.
IPSE believes that where the Commissioner recommends mediation this should be outsourced to private sector arbitrators and mediators, who should agree to charge a fixed fee based on a tariff set by the Department for Business, Innovation & Skills in agreement with industry bodies.