Steps freelancers can take to deal with late payments

Dealing with debts and disputes is unavoidable for most businesses, regardless of size, and since the economic crash of 2008/9, late payment of freelance invoices has become a scourge of the freelance sector.

Firstly, it is important to understand why this happens before looking at measures you can take to mitigate the issue and ensure you are paid on time, most of the time.

An overhaul of the Prompt Payment Code (PPC)¹ with the aim of cracking down on delayed payments owed to small businesses was announced in January 2021.

Under the new reforms, companies that have signed up to the PPC will be obliged to pay small businesses within 30 days – half the time of the previous payment window. However, the key to this reform is ‘companies that have signed up to the PPC’, which totals a meagre 3,000 companies, leaving thousands of businesses still operating with poor payment practices.

With many invoices still delayed beyond the 60-day window, it is estimated that £23.4bn of late invoices are still owed to firms across Britain, causing a negative impact on cash-flow to the business and its supply-chain, and in some cases risking the survival of the business itself.

The issue is arguably a freelancer’s biggest problem, but this problem is not isolated to freelancers, it affects small businesses too causing 50,000 business a year to close while costing the economy £2.5bn².

Businesses withhold payments due to their perception of value as to who to pay first, rather than paying invoices on time. For example, a business will likely pay their IT provider over a freelancer they have hired to write content for them. A decision such as this can be due to the risk involved with non-payment or late payment.

An IT/telecoms provider who is not paid could cut their services to the business who owes them money, which would significantly disrupt business operations. Whereas a content writer does not have that kind of latent influence over the business. Hence the perception of value of the IT/telecoms provider is higher.

Another problem involved with payments is the hiring client not telling the supplier exactly what details must be provided to ensure they are paid, such as a purchase order number, or pedantic demands including setting out an invoice in a specific way and in a specific font.

And finally, part of the issue can (in part) be of the freelancer’s own making. Freelancers are typically nice people who do not like to rock the boat. They just want to do a job that they love and enjoy and earn a living without too many complications. Due to this, businesses think freelancers are a ‘soft touch’ who will not kick up a fuss.

That is why freelancers need to get tough on late payments and ensure they are fully prepared to fight for their livelihoods. This article aims to help provide some direction to help with just that.

What can freelancers do to get paid on time?

The best way to ensure you are paid on time is to set your terms and expectations at the outset and agree them with your client. Get signatures on the agreement/s!

If you’re not sure what terms to set, then it’s a good idea to follow a ‘milestone payments’ rule, click here to read our previous article about milestone payments.

1) As part of the initial discussion and agreement process it is wise to insist on a deposit up-front. A deposit payment financially ties both yourself and your client to the success of the project. Do not be tempted to present any work without the deposit, otherwise you will be giving your client the option to walk away, leaving you without any payment and potentially with some costs to pay.

2) Agree on milestone payments to ensure your cash-flow remains as strong as it can be. These typically come in two or three stages: deposit; first presentation; final delivery.

3) Provide your clients with an incentive such as a 5% discount for paying invoices early.

4) Inform your clients that you charge interest on late payments.

The interest you can charge if another business is late paying for goods or services is “statutory interest”. Statutory Interest is 8% plus the Bank of England base rate for B2B transactions. You will need to send a new invoice to your client if you decide to add interest to the money you are owed.

Note: you cannot claim interest if there is a different rate of interest in a contract. Also, you cannot use a lower interest rate if you have a contract with public authorities³.

You are also entitled to charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest for it, with the amount you can charge depending on the size of the debt. You can only charge a business once for each payment.

Taking further action

If you have put these points in place and your client is still late, then knowing how to deal with a difficult situation such as this can often save your business money, time and the stress associated with the dispute. The key to debt collection is to act quickly, with a clear and logical strategy.

• Send polite reminders
• Pick up the phone
• Contact the payment source directly
• Issue a Letter Before Action (LBA)
• Stop all future work and hire a collection agency
• Arrange for mediation to see if you can resolve the issue amicably
• Take the client to the small claims court.

Note: Taking legal action of any kind can be expensive and, in many cases, it is a last resort. Ask yourself if legal action is worthwhile and if the size of the debt justifies this course of action.

Throughout this process it is important to remain calm so you can continue to make rational decisions about what action to take.

How insurance protection can help reduce the burden of legal costs

If the thought of handling a Small Claims Court petition fills you with dread, it might be wise to get Legal Expenses Insurance. This freelance insurance policy includes legal assistance to help recover unpaid invoices. Clients often try to get out of paying because they think you are powerless to stop them due to the cost of taking action.

With Legal Expenses Insurance, you have the backing of an entire legal team that will make clients think twice before treating you like a small fish. The policy provides cover up to £100,000 in ‘any one claim’ to cover the costs incurred by a legal proceeding.

How can you access further legal resources and guidance?

The Markel Law Hub is an online resource containing a range of documents and articles to help you manage the various laws you can encounter when running a business.

The Law Hub currently helps over 50,000 users and contains:

• 800+ DIY legal resources including contracts, policies, forms, and letter templates from Markel’s expert solicitors
• Free legal updates, templates, guidance documents, checklists, and useful links
• 460+ straight-forward guides
• 350+ links to key resources
• Up-to-date information on new legislation and case-law
• Live Chat available Monday to Friday 09:00 – 17:00
• Legal helpline.

There are two ways you can access the Markel Law Hub.

1. Simply purchase a Legal Expenses Insurance policy from us from £75.00, it only takes a few minutes via our online system, or call our friendly team on 0333 321 1403.
2. If you feel you do not require Legal Expenses Insurance but would benefit from access to the Law Hub, you can purchase an annual subscription for only £189.00 +VAT. Click Markel Law Hub for details.

If you are interested in protection against non-payment, get in touch today to discuss how our Legal Expenses Insurance policy can help you. Click the green button below to get your quote online or call us on 0333 321 1403.

CLICK HERE TO BUY LEGAL EXPENSES INSURANCE ONLINE

Sources:

1. www.gov.uk/government/news/government-tackles-late-payments-to-small -firms-to-protect-jobs
2. www.ft.com/content/2e62609a-f647-44ae-a84e-f56382685ec7
3. www.gov.uk/late-commercial-payments-interest-debt-recovery/

Related Articles:

Look at the roadmap to dealing with late payments infographic here

Why you should include milestone payments in your freelance contracts

The extra value you will discover in our Legal Expenses Insurance

When and how to add late payment interest to your invoices

Author Phil Ainley, Marketing Manager