IT Contractors – how to avoid late paying clients

There has been much talk recently about freelancers and contractors struggling to get their invoices paid by the agencies or end clients.

With the credit crunch hitting cash flows hard, the bigger companies are often guilty of extending credit terms without your say so. If, firstly, the client delays in paying the agency and then they delay in paying you, it’s added weeks on to money that would be better off in your bank.

So what can be done about it?

Vet the client

Firstly vet the company or agency you’re providing your services to. For a small fee can you instantly download vital information that could change your perspective of your client; and whether you decide to work for them.

Your accountant or bank may provide some kind of credit checking facility, otherwise there are a host of companies you can find via Google.

Payment terms

Your payment terms should be clearly stated in your contract with your client. It is also advisable to include them at the bottom of your sales invoices.

For payment terms that are 30 days you should send a ‘statement of account’ at the month’s end.
When an invoice becomes late for payment you have different choices of action that you can take:

1) Chasing the debt by post, telephone and email
2) Charging interest on the debt to encourage early settlement
3) Making a small claims court application
4) Making an on-line small claims court application

You need to consider carefully the true cost of chasing debts by contact. Your time is valuable and phoning and asking for money often does not bring results.

Writing letters and retaining proof may have some effect but sending anymore than two chasing letters is generally a waste of time, paper and postage that just end up in the bin.

If you say or write that you will ‘do’ something, it is important that you do whatever you have said you would if you want to be taken seriously.

Improved results?

Under the Late Payment of Commercial Debts Act 1998 (updated in 2002) a business that owes you money that has not been paid in the credit terms agreed is liable to pay interest on that debt.

The statutory qualifying time is 30 days before you can apply the interest, from either the delivery date of the goods or services or the date on which the debtor is notified of the debt, whichever is the later. You can then charge 8% above the Bank of England base rate on the debt.

You are also able to charge administration fees of:

£40 for debts up to £1000
£70 for debts between £1001 and £10,000
£100 for debts over £10,000

The formula for calculating the interest is debt x interest rate x number of day’s late divided by 365.

You will need to write and advise your client the date that interest will be applicable and details of the daily rate you will apply together with the administration charge. Send the letter by recorded delivery post and retain the slip in the event that you need proof in the future.

If the above measures fail, a final redress can be made by way of the small claims court. Cases that are unresolved are heard in the County Court, but an application should only be made as a final resort.

Costs to commence an application start at £30 and increase according to the amount of the debt. Remember though, this could end up a costly procedure, especially if you need to employ the services of a solicitor to represent you, you can expect to pay around £150 an hour.

You can find a useful guidance on making a ‘small claims court’ application here, and you can find more practical advice in these ByteStart guides;



Payments received

Hopefully you will be paid long before the drastic action of suing through a small claims court.

A word of caution though:

If you receive a part payment from your client that states “in full and final settlement” do not accept or bank the payment. By doing so, you are forming a contractual arrangement that you “do accept” the payment because you have banked it. You would have no further course of redress to get the remainder of the debt.

On the flip side, this ploy of “full and final settlement” may be useful if you have any debts outstanding that are genuinely in dispute.

Another cautionary piece of advice:

If a client sends you a letter stating that they will only be paying a percentage of a bill because of some dispute, don’t throw it in the bin. It’s important that you respond in writing documenting copies and postage receipts in case the dispute is taken further. If you do nothing, it could later be challenged that you failed to respond and therefore accepted the circumstances.

Remember, invoice your client at the earliest date possible and do not delay in chasing debts. It’s the “early bird catches the worm”.

About the Author

This guide was written for ByteStart by Phil Richards from Blevins Franks Chartered Accountants Ltd

Bytestart Limited

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