How to deal with unpaid invoices as a limited company contractor
While being a limited company contractor is amazing in terms of flexibility and managing your own work, there is one thing that all contractors hate without exception: chasing unpaid invoices. While most clients are great and are happy to pay on time, you’re guaranteed to, at least once, come across a client who has little regard for your terms of payment – leaving you having to chase for what you are owed.
More often than not, an unpaid invoice will turn out to be an oversight, or a result of unforeseen circumstances, and will be paid as soon as you flag it with your client. However, sometimes you will find yourself having to go down a lengthy process – so how best should you deal with it?
Keep your invoices up to date
First and foremost, you need to keep things running smoothly at your end in order to keep clients on the ball. Send invoices as soon as they are due and don’t leave them late. Ensure you have a clear view of which invoices have been paid and which haven’t – and how long until they become late payments. If you use automated accounting software then this will usually track this for you. If you’re working from spreadsheets, a list of details such as client, invoice number, date invoiced and date paid will help. Just be sure to keep this list up to date.
Have a clear finance log and payment terms
Following on from keeping your invoices up to date, having a clear finance log and process is essential. This means tracking income and expenditures, and keeping track of invoices. Again, if you use automated software, this will do a lot of the grunt work for you but if you’re working from spreadsheets, be sure to make time each week to keep them updated.
Part of having a clear process is having clear payment terms. This is so both you and your client or fee payer understands exactly when you should be paid. Payment terms should be set out in your contract but it also can help to reiterate them on your invoice. This will usually give details on when you expect to be paid (e.g. within 14 days of the invoice date) and how you would prefer to be paid (e.g. bank transfer along with the correct bank details).
Email the accounts team
Once your final expected payment date has been reached, you should send an email to chase it as soon as possible. Again, don’t leave this too long. Make sure you have the correct email for the accounts team and it usually doesn’t hurt to copy in the hiring manager. As this is early in the process, a polite email firmly reminding your client that payment is now overdue and should be paid ASAP should suffice. Often, at this stage, the late payment is an oversight or clerical error and can be rectified very quickly.
However, if you don’t hear back from the accounts team, or payment still does not arrive by an agreed day, you need to chase it up. At this stage, you can be a bit more firm, but do remain polite. It’s easy to feel as if you’re bothering people by chasing payment but you are owed this money for work you have carried out. Just imagine how a plumber might respond if you simply didn’t pay them for fixing your toilet.
Pick up the phone
It’s not as easy to ignore a phone call as it is an email. If you’re getting nowhere, get the number for the accounts team and call them. Make sure you get a name and email address for whoever you’re speaking to and follow up your call with an email to confirm everything you’ve agreed.
Charge late fees
Late fees are excellent as they a) compensate you for late payment and time spent chasing up, and b) often scare late-paying clients into paying up quickly. Legally, you can claim interest and debt recovery costs if your client is late paying for your services. By law, a payment is considered late 30 days after the customer receives the invoice, although there are variations on this which you can see on GOV.UK. But what can you charge?
- You can charge interest on the late payment, which is set at 8% plus the Bank of England base rate;
- You can also charge a fixed sum for the cost of debt recover. This is equal to:
- £40 for debt up to £999.99;
- £70 for debt between £1,000 and £9,999.99;
- £100 for debt over £10,000.
If you decide to add late fees, you need to send a new invoice with a new calculation for money owed. Although in the experience of many contractors Kingsbridge has spoken to, the mere mention of late fees is often enough to see your client make your payment.
Consider using a debt recover service
A debt recovery service is usually a last resort after all other methods have been tried. If your client is refusing to pay you and you’ve exhausted all other solutions, hiring a debt recovery service can see the money you’re owed recovered, for a fee. If you have legal expenses cover, you may have debt recovery included.
If you’re reading this blog and worrying you’ll never see your invoice paid, don’t panic. More often than not, unpaid invoices are sorted out speedily and to everyone’s satisfaction without the need to involve third parties.