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What to do when a client doesn't pay: tips for getting paid

4-minute read

What to do when a client doesn't pay: tips for getting paid
Jessie Day

Jessie Day

20 April 2020

Customer won’t pay for work done? It’s a big problem for many UK businesses. And as the coronavirus pandemic causes widespread disruption, it’s more important than ever for small businesses to get paid as promptly as possible.

A webinar hosted by the The Institute of Chartered Accountants in England and Wales (ICAEW) has highlighted that prompt payment practice will be one of the most crucial factors in enabling the UK economy to recover at speed after the coronavirus pandemic.

Philip King, interim Small Business Commissioner, began the conversation with statistics including:

  • there’s currently £23.4 billion outstanding SME late payment debt
  • 24 per cent of SMEs are forced to pay suppliers late due to late payments further up the supply chain

But these figures were collated before the coronavirus outbreak, so it's unclear how coronavirus has affected late payments. The sectors most affected are retail, hospitality, leisure, construction, engineering, healthcare and business services.

Here’s what to do if someone doesn’t pay you for a job.

What to do when a client doesn’t pay

If your business is (or could be) affected by late invoice payments, there are a few measures you can take. Don’t be afraid to set your own payment terms and expect your clients to respect them.

You should monitor the ‘ageing times’ of your invoices – the length of time that elapses between you raising an invoice and it being paid. Try to keep these periods short and manage your expenditure around them, to help avoid troughs in your cash flow.

Prevent late payments

Before late payments start making running your business even more difficult, there may be ways you can prevent them before you even raise the invoice. Every business will be different, but it’s good practice to:

Vet customers – depending on the nature of your business, you may be able to do some background research on your clients before doing business with them. Consider running credit checks to ensure they have a track record of prompt payment. Many credit reference agencies have affordable services for small businesses.

Outline payment terms – try to make your payment terms clear from the outset. This will help your client plan for payment, and makes it more difficult for them to claim they didn’t know the deadline. Make sure your payment terms are clearly displayed on invoices, along with details of payment methods. If you accept payment by bank transfer, make sure your account details are included too.

Invoice not paid (despite your best efforts)?

Sadly, payments can still often be late. If you do run into difficulty, here are a few things you can do to speed things up and minimise damage.

Chase invoices

This might sound obvious, but you should always chase outstanding invoices. Remember, your clients will be concerned about their own cash flow, and this can mean they pay you at the last minute. Often, a phone call or email is all that’s needed for settlement. Don’t be afraid to chase late-paying customers – you’re well within your rights to do so.

Keep money in reserve

If possible, you should keep some reserve funds. This helps make sure you’re never critically short of cash because of an unpaid invoice. The size of this fund will depend on the average value of your outstanding invoices (and your regular expenses) but, at the very least, it should be large enough to cover essential costs like wages, rent and stock.

Be patient where you can

As stressful as invoice chasing can be, maintaining a good relationship with your clients is important. Many businesses and customers may be struggling too, and the best way to mitigate damage will be to stay in contact. So be reasonable when chasing late payments (and take expert legal advice if you need to).

Our Knowledge centre has legal and financial news and information for businesses, along with free business templates. These include a flexible working policy template and a leave of absence policy template.

How to collect money owed for work done

Factoring and other invoice finance products can provide you with an advance of up to 90 per cent of the value of your invoices within 24 hours of them being raised. Your factoring partner will pay you the cash, and then take on the work of chasing your client for payment. Once the invoice has been settled, they’ll pay you the outstanding balance, minus a pre-agreed service fee and interest.

A factoring facility can be cheaper than using your business overdraft and will often come with the option of using your own branding. This means communication with your customers doesn’t come out of the blue from a third party.

Can customers withhold payment?

They can, but not necessarily within the law. If you’re having a serious problem with non-payment of invoices, or a customer not paying for a specific job, you may need to take legal action and work with an expert in commercial law. Take real care before acting, to prevent the customer putting in a claim for breach of contract.

Not at that stage yet? If you’re struggling with a customer refusing to pay for work done, the first step is to issue a late payment demand or ‘letter before action’.

How to write a late payment letter

Before you get started, take a look through our late payment letter template and guide. It sets out a step-by-step polite notice, clear reminder and a final warning plan, along with the key things each letter needs to include.

It comes with a free template to download as a PDF or Word document.

Have you been impacted by late payments? Let us know in the comments below.

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