One of the top concerns for self employed businesses is cashflow. Especially when it comes to being paid by their customers. Not being paid can have severe consequences on the personal finances of small business owners or solo operators.
Whether you are just starting or you have experienced non payment issues, we cover all you need to know. This includes how to go about recovering payments from customers appropriately and legally. We also share some tips on how best to prevent this from happening in the first place.
See Also: Self Employed Sick Pay – a guide on solo contractor’s rights to paid sick leave.
How Much of a Problem is Late Payment?
When you look at some of the statistics gathered for late payments affeting the self employed, the findings are worrying.
According to research from accountancy software providers FreeAgent (2020), only just over 50% of invoices sent out were paid by the customers on time.
Non payment is a big issue for self employed workers and it makes managing finances extremely tricky. It can be very stressful and somewhat daunting having to chase late payments.
What to Do if You’ve Not Been Paid – Chasing Invoices
You have finished a job and should feel satisfied and happy. Not if you haven’t been paid for it though.
This can be a very tricky side of the business, so here’s our list of thigns to do to chase those late invoices and maintain your cashflow.
1. Get In Touch With The Client
The first step is to make contact with the client.
Sometimes it may well be a genuine oversight on their behalf. Often it just takes a quick, polite call and the money is in your bank pronto.
2. Resend The Invoice
Again, the customer may just need a gentle reminder that payment hasn’t been made yet.
Sending a late reminder invoice is often enough to jump them into action. It can help to include a copy of the signed contract, if applicable, too.
3. Overdue Notice
You can send a further email with red lettering with the word ‘overdue’ or similar. Often seeing a letter with a red warning is enough to spark a response.
4. Seek To Resolve Issues
If payment is not forthcoming then it is time to get a little firmer in your handling of the situation.
You have done the work and now you need paying for it. After all, you wouldn’t dream of doing your weekly food shop and telling the cashier you’ll pay for it later! Initiate a conversation with the customer to understand their issues.
5. Agree On A Payment Plan
Sometimes, life just gets in the way and throws some curveballs out there.
This means that customers genuinely had every intention of paying and then something unexpected happened. If you feel comfortable doing so, then agree to a payment plan over several months instead of one lump sum.
6. Send Out A Letter Before Action
This formal and legal letter needs to be sent out before further action can be taken.
This should be done after you have tried to make good contact to this point. The letter should outline the date you require payment to be made, how to pay this and what will happen should this not happen.
The letter should state you have sought legal advice and this letter is part of legal proceedings. It must also include the heading ‘Letter Before Action’ on it.
7. Begin A Small Claims Action
If the payment date set out in your letter before action has passed with no activity, then this is your next step.
You can download a Small Claims Form and fill this in or you can do it online. The court will then send a copy of this to the customer (defendant). This then sets in motion a chain of events which will hopefully result in you getting paid.
8. Small Claims Mediation
In some situations, the small claims court will offer mediation between the parties to try and resolve the dispute. This is not always successful but is another approach to consider.
9. Approach Your Insurance Company
Some small businesses have insurance in place to help cover them in the event of non payment.
Should the payment deadline pass with no communication then your best bet is to approach your insurance company. They will support you by providing you with the next steps you should take.
For example, Childminders have insurance companies to cover them for all legalities involved in childcare. They will also help with non payment disputes quickly and efficiently without them going to court.
10. Involve A Collection Agency
You can seek the services of a collection agency to recover any unpaid fees. It is important to do your homework first though and find someone affordable and reputable.
How to Reduce Unpaid Invoices
As a small business, it is imperative to have firm handling of your finances from day one. This includes knowing how you want to be paid, when payment should occur and how you will reduce the likelihood of non payment.
We share some important hints and tips for small businesses below:-
1. Good Communication
Make sure from the offset that there is good, clear communication from everybody. This includes the expectations around payments.
2. Ensure There Is A Signed Contract
It is always wise to have a legally binding contract in place that lays out all the terms and conditions. This provides you with extra protection should things go pear shaped.
3. Clearly Explain How Payment Will Work
Make sure your customers understand how payment will work. Some self employed businesses will take payment upfront. This is a great way of ensuring you are paid and there is less risk of having payments not met. Other companies may take part payment up front with the rest on the completion of the work.
4. Try To Avoid Payment In Arrears
Wherever possible, try to avoid getting into the habit of accepting payment in arrears. If you are in a job that means this will happen, consider taking a percentage upfront or at least a deposit.
5. Take A Deposit
A deposit before work starts gives you a little safety net in case anything goes wrong during the business transaction. This can be deducted from the final invoice or held onto if payment is not forthcoming.
6. Add Interest To Your Invoices
Adding some interest to late payments can be a simple way to ensure everyone pays on time. No one likes having to pay more than they have to.
7. Use An Online System To Create And Chase Payments
There are many bookkeeping systems out there for small businesses to benefit from. You can create invoices quickly and they help you keep on top of late payments too. Many will automatically resend invoices if they haven’t been marked as paid too.
8. No Payment, No Work
If you have not been paid as agreed then you are within your rights to withdraw your services. This shows you mean business and will often prompt payment.
Case Study – Non Payment As A Childminder
Childminding can be an extremely lucrative business, especially if your children are older as they won’t count in ratios.
However, it is one of those professions where non payment is a big issue. Most childminders will take payment in advance for the following week or month. This goes some way to protect their business finances.
In this day and age, childcare payments often come from an abundance of avenues. This can include parents, government schemes, vouchers, and disability allowances. This means it can get quite complicated to keep on top of bookkeeping.
How I Dealt With Non Payment
During my time as a childminder, I had a few experiences of non payment and having to pursue legal avenues to claim back the money owed.
When you register as a childminder, you need to get public liability insurance. PLI offers you protection against any claims made against you but also protects you in the event of non payment.
As soon as I realised one of my clients had missed a payment I took the following steps:
- I sent a friendly invoice reminder by email and post.
- I then sent an overdue notice by email and post.
- I suspended childcare until the monies owed had been paid.
- I contacted my insurance company for advice.
- They advised me to write a Letter Before Action.
- This letter was both emailed and sent via recorded delivery post.
- The deadline on the letter passed with no word so the insurers took the case on.
- I received my monies owed (plus my late fee charges) via my insurance company.
- They carried on pursuing the client and took over all proceedings.
- Childcare was suspended.
Letter Before Action Template
Below is the Letter Before Action template I used to chase late payments.
DATE OF LETTER
YOUR ADDRESS
BUSINESS NAME
LETTER BEFORE ACTION
Dear (name)
This letter concerns a breach of contract between (my business name) and (client’s name). You have failed (at the time of writing, insert date) to pay for (child’s name) childcare space for the last (insert number of sessions). This is despite reminders and letters of overdue payments.
I have, therefore, had no choice but to seek legal advice from my insurance company. At their request, I am sending this Letter Before Action by both email and recorded delivery in the post.
As per our contract, you were due to pay (child’s name) childcare fees on (insert date) and failed to do this despite several reminders. As per our contract, late fees have also been applied per day that fees are late so at the time of writing (insert date) your total unpaid fees sit at (insert amount).
This total will be updated every day on Baby’s Days so you can see the total on any given day.
This letter is a final demand for payment after pursuing advice from my legal team. Please pay your childcare fees within 14 days of the date of this letter (insert today’s date). To be clear, 14 days from now will be (insert date). Failure to do so will result in the next step of legal action.
Yours Sincerely
Name
Business Name
FAQs
You can legally charge interest on invoices once they become overdue.
The amount it will cost to go to a small claims court for an unpaid invoice will depend on the amount you are trying to recover. It costs a minimum of £35.
