The UK economy continues to be turbulent due to the Covid-19 pandemic.
For example, the Bank of England’s Financial Stability Report recently stated that insolvencies are likely to increase as temporary bans on winding-up petitions end in September.
As this and other government support measures come to an end, many companies will experience cash flow pressure.
Business owners should therefore be prepared for some customers to not pay their invoices on time.
This article outlines how to prevent non-payment, provides eight steps for dealing with unpaid invoices and explains what legal options are available in severe cases.
The best course of action is to implement measures to prevent non-payment. Simply put, this involves getting credit control procedures right before any issues can occur.
Pre-screen customers for financial health
One of the most important steps is to avoid working with customers that pose a credit risk in the first place.
This means assessing potential customers for financial health before your sales and marketing team approaches them.
You can either conduct these checks yourself or use a tool like Red Flag Alert. We’ll go into more detail about our detailed health ratings later in this article.
Ensure all costs and payment terms are clear
The best way to ensure you get paid on time is to make sure payment expectations are clear.
Before a project begins, this involves outlining the estimated costs and taking time to answer any of the client’s questions upfront.
This will provide clarity on when the client should pay their invoice or what the full amount is.
Ask for the payment upfront
A sure way of avoiding an unpaid invoice is to ask customers for full payment before a project begins.
However, some customers may be hesitant to pay before receiving any work, especially if your business is new.
In this instance, ask the client to make a deposit. This demonstrates that the client has the means to make the payment and provides an incentive for you to complete the service.
Establish good payment habits
To ensure that your clients pay you on time each month, put measures in place that establish good payment habits.
There are a few ways this can be done:
- Ensure that each invoice has a consistent format—this article provides detailed guidance on what you should include
- The details of the invoice should be laid out clearly with supporting notes and evidence of work completed
- Where possible, send the invoice at the same time every month. This will ensure the customer knows when to expect it
Not only do these habits ensure that your company sends out invoices on time, but they also help establish transparency if there are any issues with payment.
The following example will show you what a basic invoice should look like:
Offering early payment discounts to clients is a delicate balance. This can be a viable tactic for repeat offenders, but it could prove a false economy if you end up losing money in the long run.
Here are some good ways to frame early payment discounts:
- Standardize the incentive across all invoices. For example, if the client pays within one week they are eligible for a 5% discount.
- Avoid confusion in your payment process. Accept all forms of payment and make sure these options are clearly outlined on the invoice.
8 Steps to Take in the Event of Unpaid Invoices
Let’s say that you’ve submitted an invoice to a client and waited patiently for it to be paid. However, the deadline has passed and you have not received your money.
The following eight steps outline what you should do next.
Send a friendly reminder that the payment is due, along with the unpaid invoice
The first step in collecting a late payment is to send the client a friendly reminder that their invoice payment is due.
Often, late payments are an honest mistake and a follow-up is usually enough to make the customer pay the invoice.
If you don’t receive the payment after an initial reminder, contact the customer to discuss the invoice and see if there is anything you can do to help.
It’s possible that the customer is experiencing cash flow difficulties and needs a few more days to get the money together.
Come up with a payment plan
If the customer is experiencing cash flow issues and will not be able to pay the invoice in full, suggest setting up a payment plan.
Not only will this ensure you get paid the full amount in future, but it will also allow the customer to establish a payment schedule that works for their budget.
Here are a few basic details to include on a payment plan:
- The instalments the customer can afford
- How long the client has to pay back the money owed
- The interest rate (if applicable)
- What the payment instructions are
- Details of the consequences of a late payment
- Ensure the agreement is in writing and that the customer signs the document
It’s also important that customers know that payment plans are temporary solutions to their financial difficulties.
The last thing you want is for customers to get comfortable paying small instalments each month instead of the full amount owed.
Issue late fees
This is one of the most efficient ways to chase debts when customers have missed their payment deadlines.
Charging late fees creates a sense of urgency among clients because it encourages them to act quickly to avoid another penalty.
If you decide to issue late fees, it’s important that you are transparent about these terms upfront.
When you take on a new client, be sure that late penalties are clearly outlined in the contract.
For instance, if the customer does not pay the invoice within two weeks they will be given a written warning. However, if the payment is late by one month they will be charged 1% of the amount overdue.
It’s also important to remember that some businesses may not be paying you due to financial difficulties. In these cases, sending them a late fee won’t encourage them to pay an invoice that they simply can’t afford.
Another option is to temporarily suspend services to the customer who owes you money.
Although this can prompt them to settle the late payment, it’s vital that you check the payment terms in your contract first.
Unless there is an explicit clause that allows you to suspend services to a non-paying customer, you could be in breach of your contract.
Submit a statutory payment demand
A statutory payment demand is sent when a business is owed money and has made several unsuccessful attempts to receive late payments.
When an individual or company receives this letter, they have 21 days to pay the debt or reach another agreement.
If the recipient of the statutory demand does not pay the debt or have it set aside in this time frame, they could be at risk of a bankruptcy order or winding-up petition.
These documents can be issued without taking legal action if the individual owes you more than £5,000 or the company owes you more than £750.
These letters should include:
- Details of the full amount owed.
- Outlines of the product or service the money is owed for.
- The date the payment is demanded by.
- Copies of correspondence with the client. For example, the contract or reminder letters.
- The details of the legal action your company will consider if demands are not met.
A statutory payment demand is often a last resort because it can damage business relationships. This is why you should first take less drastic steps to recover the late payment.
If the client does not fulfil the payment demand, business owners have the legal grounds to present a winding-up petition.
Although this can be an effective way to receive unpaid funds, restrictions on statutory demands and winding up petitions have been extended until 30 September 2021.
Make a money claim online
This is another good option if an individual or organisation owes you money and will not pay you back.
Before you make a money claim online, seek legal advice to determine whether or not it’s worth going through with the process.
This is because you will have to pay a fee based on the amount you are claiming, plus interest. To calculate the value of your claim, take a look at this website.
The court will send the claim to the person or organisation who owes you money and will give them five calendar days to respond.
However, you can only file a claim online if the client is not being protected through the government’s Breathing Space scheme that applies to England and Wales.
This scheme was launched in May 2021 to give people “legal protections from their creditors for 60 days, with most interest and penalty charges frozen, and enforcement action halted.”
According to recent insolvency statistics, there were 17,098 registrations for the Breathing Space scheme between May and July this year.
If your attempts to receive late payments have gotten you nowhere, it’s time to seek outside help.
Let’s take a closer look at the options available to help you receive the money you are owed.
Seek help from a debt collection agency
Debt collection agencies like Direct Collection Bailiffs Limited specialise in helping business owners recover payments that are more than 90 days late.
A debt collector will contact the client who owes the money, try to reach an agreement on how to settle the funds and take a percentage of the amount recovered.
If the customer who owes you money ignores the collection agency, they can be issued with a County Court Judgement (CCJ) which demands that they repay the debt.
However, the severity of a CCJ should not be underestimated.
If the full amount is not repaid within 30 days of the judgement being received, it will remain on the customer’s credit profile for six years.
This will affect their ability to apply for loans or agree to credit with suppliers.
If unpaid invoices are affecting your cash flow, a factoring company like Bibby Financial Services can help you receive the money while you wait for the debt to be paid.
Factoring is the process of selling unpaid invoices to a third party and getting an immediate advance on the money that is owed.
The factoring company will collect the customer’s payment, deduct the service fee and send you the rest of the money.
It’s important to remember that using a factoring service is a temporary solution.
If you use a factor for multiple invoices, the service fees will accumulate and you may lose money in the long run.
Take legal action
A lawsuit may be necessary if you have exhausted all other debt recovery options.
Before you take legal action, make sure that the amount you are owed is worth the time, money and energy that lawsuits require.
Hire a solicitor
Taking legal action can be a daunting process, especially for small businesses. However, a solicitor will give you practical legal advice on the best way to proceed with the debt recovery process.
Solicitors also help their clients negotiate fair settlements and agree upon terms that work for all parties.
One of the benefits of hiring a solicitor is that they will take care of the lawsuit’s administrative duties while you focus on running your business.
Go to the small claims court
If you can’t afford a solicitor or a debt collection agency, consider going to the small claims court.
This option is for simple cases that need to recover debts of less than £10,000. The small claims court is a popular choice because the process is faster than other court proceedings.
To make a claim against a client who owes you money or settle a dispute, you would need to file a Form N1.
Remember, clients protected under the government’s Breathing Space scheme cannot be taken to the small claims court.
Avoid Financial Risk with Red Flag Alert
In this article, we have outlined several steps to take when clients do not pay their invoices on time. However, the best course of action is to prevent this problem in the first place.
Red Flag Alert’s database of 6.5 million companies is a powerful B2B business development tool that provides detailed predictions on whether or not a company is likely to go insolvent and default on its invoices.
This helps ensure that you only work with financially robust clients. We do this by tracking dozens of financial health indicators in real-time, including:
Insolvency doesn’t just happen to a business without warning. There are indicators for months or years beforehand that a business is trading in an unsustainable way.
As soon as a small risk emerges, we send out a notification. This allows you to act long before insolvency becomes a possibility.
For a free demo of how Red Flag Alert can drive your credit control process, please get in touch with Richard West at email@example.com or on 0344 412 6699.