How to get paid on time and handle late payments

Eager to start work with a new client or project?

Fantastic! But before you start, invest time in laying the groundwork to make sure that you will get paid on time and avoid disputes with your clients down the line.

Why is this an important issue?

Late payments cast a long shadow over UK SMEs, stifling growth and threatening survival.

The latest research by Aldermore Bank suggests that 3.6 million small to medium-sized enterprises have some form of outstanding late payment from customers, leaving them £96,772 out of pocket on average.

Late payments have a detrimental effect on the financial health of SMEs. Over a third (38%) of businesses are having difficulties paying essential business costs and 36% are struggling to pay their own suppliers on time as a result of cash flow issues.

Setting up a solid foundation

Securing clear agreements from the outset is paramount. Make sure you have a contract in place detailing agreed prices and payment terms.

Also make sure that both you and your clients sign the contract before work commences. This helps mitigate future disputes and safeguards your cash flow.

If sensitive information is exchanged, a non-disclosure agreement (NDA) is essential. An NDA protects confidential data, preserving trust and preventing potential breaches.

Documenting every detail, from payment schedules to data protection, establishes a solid foundation for a transparent and secure client relationship.

VIDEO: How to get paid on time and successfully tackle late payments

Watch this webinar to learn how to mitigate the risks of late and non-payment of invoices and manage cash flow more effectively:

What payment terms should I set?

Setting the right payment terms is crucial for managing your business's cash flow. Here’s a guide to help you decide:

• One-off goods or services: It's standard practice to offer payment terms of seven, 14 or 30 days after you've delivered the product or completed the service.

• Longer-term projects with multiple stages: Consider structuring payments around milestones. Bill your client upon the successful completion of each pre-agreed stage. Make sure you clearly document these milestones in your contract or proposal to avoid any future disputes.

The duration of the payment terms you offer is ultimately your decision, but always weigh up these two key factors:

• Your client's financial health: Extending payment terms is like offering a line of credit. If you suspect a client might be facing financial difficulties, it's wise to minimise your risk.

  Consider shortening the payment window, requesting a deposit or potentially requiring full payment before starting work.

• Your own cash flow requirements: How quickly do you need the funds? Factor in your own deadlines for paying suppliers, staff or other business expenses when deciding on payment timelines.

Getting your payment terms right is a key part of maintaining a healthy cash flow for your business or freelance work.

How do I make sure my clients will pay me on time?

Making sure clients pay you on time is crucial. Here's how you can streamline this process:

1. If you're emailing invoices, use email tracking tools to confirm when clients have viewed your invoice.

2. Offer convenient payment options by including a direct payment link for card transactions. Simplifying the payment process encourages people to pay you promptly.

3. Consider sending regular reminders, such as a notice one week prior to the invoice due date and another on the due date itself. These proactive measures can significantly reduce late payments and improve your cash flow.

What do I do if my invoices are overdue?

Once an invoice becomes overdue, you need to start taking immediate steps to chase your debtor.

Make immediate contact to find out why there is a delay and follow up with phone calls, an email or a letter confirming what was said.

If your client still doesn’t pay you, you should start sending out chasing letters. Here is a suggested timeline for escalation:

1. If your invoice remains unpaid five days after it becomes overdue, send a first letter chasing payment.

2. If your invoice remains unpaid 15 days after it becomes overdue, send a second letter chasing payment, explaining that if you don't receive payment promptly, you may charge interest on the debt and/or apply a late payment charge.

3. If your invoice remains unpaid 30 days after it becomes overdue, send a final letter chasing payment, explaining that if you don't receive payment, you'll apply interest and other debt recovery charges and take further action to recover the money.

If clients don't pay

If you've chased your client and they're still not paying you, there are a few options available to you:

• Using a debt collection agency: While this can be a cost-effective method for getting your money back, taking this step does send a strong message to your client that your business relationship has disintegrated.

• Alternative dispute resolution (ADR): You can use any alternative dispute resolution scheme that you're part of (for example, if you're a member of a trade association which runs its own scheme). If the money you're owed is from a larger business, you might be able to complain about them to the Small Business Commissioner.

• Statutory demand: A statutory demand is a formal, written demand for payment of a debt that you can send to your debtor without going to court and without paying any kind of court fee. If unpaid, a statutory demand can be used as the basis for a later application to wind up the company

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