Posts Tagged ‘late payers’

Last week, my business made £1,180 from a customer without doing any work. All it took was for this particular customer to pay their invoices late.

I know that Late Payers are a constant worry for the majority of freelancers and small businesses. The majority of my own customers pay late. However, on the whole, my late payers are only 2 or 3 days late in making their payments – which I can live with.

But this one customer was over 80 days late in their payment, and the amount was large – very large. In fact, the original invoice was nearly £60,000 in value. As you can imagine, when the amount is so large, and with payment being so long overdue, it can lead to a lot of sleepless nights – will they pay at all? Will I have to take them to court? Will they eventually turn around with 1,000 reasons why they are not paying (delivery was not as they wanted, etc)? In short, would I ever see the money?

I had a signed contract – so was covered from that point of view. In the contract, it talked about my terms and conditions, which included my late payment penalties – so was covered there. And my online accounts system (the wonderful FreeAgent was regularly sending them chase notifications).

After the invoice was 30 days overdue, and after a lot of worry – I bit the bullet – and raised a late payment invoice for 30 days of interest (8% over the base rate – so maths = (((amount of invoice + 8.5%)/365 days) * 30 days) plus my £50 admin fee.

30 days after that, I raised another 30 days of interest and another late payment fee, and then a third late payment invoice. They now had four invoices outstanding (the original plus 3 late payment invoices)

After the third invoice, it did seem that I was wasting my time – I was calling them and was being given more and more complex reasons for the late payment (we have a new accounts system, the payment manager is on holiday, its in the next payment run) – I even started to research on Google which debt collection company would have the most success (and which would cost me the least).

And then, guess what…. they paid. There was no email or call or anything – the money just magically appeared in my company bank account. Not only did they pay the original invoice, but also the late payment invoices – so an extra £1,180 into my bank for no effort from me.

And you know what – that’s more money than I would have gained in interest in having it sit in a bank – so I am very happy.

We all suffer bad payers – but don’t give up. Chase, chase, and chase some more. When things get too much, threaten and then do it – raise that late payment invoice. Don’t put up with those late payers. And don’t wait until they pay to raise a late payment invoice – raise one a month – it acts as a reminder to pay the original invoice (and that you are serious).

As long as you have a signed contract and a clear set of terms, the law is on your side.

A few months ago I talked about the different emails I use for chasing late payers.   Judging by the interest this post received, it seems that late payers are becoming more and more of a problem for freelancers and small business owners.

As regular readers will know, I am an advocate of using cloud based accounting software – and my choice for this type of service is FreeAgent.

As I received so much interest in the late payment email templates, and a few questions on how I set up automatic chasing of late payers, I thought I would today share how I set up Freeagent to do the escalation for me.

I am sure that many, if not all, of the other accounts systems out there have similar late payment escalation systems in place – so this will be just as relevant.

Setting up Late Payment Chase Escalation in FreeAgent
One of the things I love about freeagent is that in many aspects of the accounting process, you can set something up and forget about it.  This is equally true for chasing late payers as it is for setting up standing orders or salary payments.   In terms of setting up late payment chase emails, it’s just a matter of setting up the email templates, and letting FreeAgent get on with it.

Within the Freeagent system, under the main settings menu (at the top of the screen), there is an option of Invoices and Estimates, and under this, an option for Invoice Emails.   This option allows the definition of all kinds of email templates – initial invoice cover email, thank you (for payment) email, and of course late payment chasing emails.

When I initially started using FreeAgent, I just set up a single email reminder template which sent a chase email 3 days after the invoice was due, and then sent the same email every 3 days until payment was made.   This worked for a while, but if you got the same email over and over, would it persuade you to make payment?  So I made it more sophisticated and gained better results.

Using the template emails defined in my late payers rules, I set up 9 different late payment rules – 2 emails for each stage (in case the first one was missed).  For each stage of the chase process, I created a new chase email, and set the Reminder Rules for the days after payment is due to send the email.    I have found that sending an email every 3 or 4 days seems to work best.

For each stage, the subject of the email changes to reflect what is about to happen – a warning, about to raise charges, on stop, debt recovery etc.  The text of the email also changes as per my late payers email templates already discussed.

Note quite automatic
Now whilst this does all the late payment chasing for me, its note quite fully automatic.   I do have to raise late payment invoices (with charges and interest) now and again – and even if FreeAgent was able to do this, I would still prefer to do this by hand (using the FreeAgent invoice creation screen) just to remain in control.

To allow me to keep track of what I need to do next (raise a late payment charge, put them on stop or pass them to a debt recovery company), the 2nd email of each stage in the sequence is marked to be copied back to me.   That way, when the email arrives in my in tray, it acts as a trigger and reminder for my next action.

My sequence and dates of my chase emails in FreeAgent are then as follows:

Late payers can kill your company.   There is nothing worse than having completed work, and having to nag, chase and threaten a client in order for them to pay their bills.  Whilst they sit back withholding your money, your own bank balance reduces and panic can set in.

There is lots of advice available on the web about what to do about late payers for Freelancers, Contractors and Small Business.  I myself have talked before about various ways of dealing with late payers.   But a lot of this advice is not being honest about the real world, and how business really happens.   So let’s all put aside the make believe situations, and talk about what you can REALLY do about late payers.

Do you still want them as a customer?

Everything boils down to this question.   Once they pay that outstanding bill, do you still want them as a customer for future work?   If the answer is No, then all the options are open to you because the relationship is already damaged, so it’s hard to make it any worse.  Once you have decided the relationship is over – you are free to send nasty emails, make nasty calls, and even turn it over to legal professionals to send them threatening letters.

BUT, if you intend to keep them as a customer, and there is a real chance of more work, and you don’t want to ruin the relationship, then in a REAL world, your hands are somewhat tied.

This decision even extends to the pre-emptive measures that are advised.   Tighter payment terms, full payment up front, payment on delivery – all of these options sound great – right up to the moment you are in the sales negotiation.    When you are struggling to land a new customer and a prospect is willing to award you the work but only if you agree to their standard 100 day payment terms – are you really going to say no?  Really?

What you can Really Do

So that’s assume we work in a real world full of recession, tightening of belts and late paying customers.   What are some of the options that you can do if you don’t want to kill the relationship and the prospect of any future work?

Late Payment Fees – This is my method of dealing with late payers.   When somebody is late, I give them a sting through an invoice for an ‘administration’ fee.  I make a small bit of money out of it, and they get nudged into paying the original bill.  If push comes to shove, you can always cancel the late payment charge to keep the relationship sweet for future work.
Money Up Front – A lot of customers will reject this idea – but it comes down to negotiation.  Where a customer is always late, you could threaten to start raising Pro-forma invoices which would need to be settled before work is started.  Full payment up front is one extreme of the payment cycle, with late payment after the deliver as the other.  So you have a wide width for negotiation for future work with an agreed percentage (10%, 30%, 50% or 75%) up front and the rest after delivery.
Put them on STOP – If they want additional work, you can put them on stop – which means that you are not allowed to do any more work for them until they pay.   I have a mean person appointed in my company (a person picked at random) who I can blame for the decision.  Putting them on stop and not being allowed to provide support or that new development is never my decision – no, I was instructed to stop work by Jo Blogs (who is not available and won’t discuss the situation whilst money is outstanding) – sorry.
Extended Payment Terms – The bigger the customer, the more power they will use against you.  I have one multinational client which sent all suppliers (including myself) a letter 3 years ago which said they were rejecting all supplier terms and replacing them with their own 90 day terms.  I had the choice to take it or leave it.  Guess what…. They provided me a fair chunk of work – so I took it.   In my situation, there was no room for negotiation, but in a real world, payment terms could be reduced for late payers through negotiation.
Check your customer history – For new customers, don’t forget you can do credit checks.  At the very least, it is worth Googling “Their Co Name Late Payment” or “Their Co Name Accounts” or “Their Co Name supplier problems” to see if anybody else is talking about them being a problem payer.   If an existing customer suddenly starts making slow payments, it is worth doing this for your existing relationships to see if anything has changed.
Protecting Yourself with a contract – When push comes to shove, you can only threaten your customer with what is in your contract.  So make sure your payment terms, late fees, the right to alter the terms and ownership rights are clearly detailed.
Resign to chasing forever – But at the end of the day, if they are an existing customer and you want the future work, you may not have any other option than to resign yourself that they have the final decision on when they will pay you, and that you just have to keep chasing without turning nasty in order to keep the relationship sweet.

One of the most boring and annoying tasks a freelancer or small business owner has to do is to chase customers for overdue payments.   Whilst there are no hard and fast rules, I believe that there are 5 stages to chasing payment.

Of course before you chase, you need to know that payment is due.  Tracking invoice due dates and payments is the key to good credit control, so first make sure your accounts system is up to the job to make tracking and chasing as easy as possible.

So my own personal five stages of chasing are as follows:

Invoice becomes Due

It never hurts to tell customers that payment is due.   A quick email is all it takes (some accounts packages like Freeagent will automatically send this (and other) reminders for you).   I keep it simple and straight forward such as:

Jo,

Just a quick reminder that payment is now due on invoice number 9182.  This invoice was in regard to the {whatever the task is that you performed} and was for £999.99 (including VAT).  I would be grateful if you could arrange payment at your earliest opportunity.

If you have already made payment, thank you for your custom and please disregard this email.

Invoice Due + 7 days

Once the invoice is 7 days overdue, I repeat the reminder.  However, in my terms and conditions I have a late payment fee – so I include a note that this late payment fee will soon become payable:

Jo,

Please note that invoice number 9182 is still overdue.  This invoice was in regard to the {whatever the task is that you performed] and was for £999.99 (including VAT).

Can I also take this opportunity to remind you that as per section 7 of our Terms and Conditions, late payment of such invoices is subject to additional interest and an administration fee.    To avoid these additional costs, please could arrange payment at your earliest opportunity.   If you have already made payment, thank you for your custom and please disregard this email.

Invoice Due + 10 days

Once the invoice is 10 days overdue, I send a further email, but now I also state that we WILL be raising the late payment fee (and I raise the invoice the following day – extra money for me):

Jo,

Further to my last two reminders, I note that invoice number 9182 is still overdue.  This invoice was in regard to the {whatever the task is that you performed] and was for £999.99 (including VAT).

As per section 7 of our Terms and Conditions, late payment of such invoices is subject to additional interest and an administration fee.  We are in the process of raising an additional invoice for this fee which will be sent by a separate email.    To avoid any additional costs, or if you have already made payment, please contact me as soon as possible to confirm the payment has been made.

Invoice Due + 20 days

Once the invoice is 20 days overdue, I generally will put the customer on STOP.  Of course, this really only acts as a persuader to pay when I am still doing further work with the customer, but it is another chance to chase and remind your customer to take late payment seriously:

Jo,

** ACCOUNT ON STOP **

Further to my previous reminders, I am having to email you in regard to invoice number 9182 which is still overdue.  This invoice was in regard to the {whatever the task is that you performed] and was for £999.99 (including VAT), and was due for payment one month ago.

Because this payment has been overdue for so long, I have been instructed that we have had to place your account on STOP.  As a result, we will not be able to provide you with any support, continue on an developments or discuss any future service until this invoice is settled.

To avoid any additional costs, or if you have already made payment, please contact me as soon as possible to confirm the payment has been made.

Invoice Due + 25 days

It is vary rare that I ever get to this point in time.  But when I do, I stop sending emails, and start phoning.  Yes, it takes more time, and feels awkward, but at the end of the day you and I have done nothing wrong, it’s the customer who should feel bad for not paying their bills on time.

Keeping the cash coming in is probably the most important job in any company.   It doesn’t matter if you are a one man band or a multi national, if your customers don’t pay their bills, the bank account will quickly empty and the company will start to struggle.   Therefore, I present my 10 stage plan for dealing with late paying customers in your small or freelance business:

Monitor accounts and watch payments due
The first thing you need is a method of monitoring payments – when invoices are raised, when they are due, and when payment is made.    In its simplest form, this can be a spreadsheet which you update whenever you invoice or reconcile payments.  However, it’s far more effective to use some form of accounts package which provides tools for monitoring payments due.   The Freeagent system I recommend provides a specific screen of payment monitoring, but any good accounts system should provide this function.  It is useful if this is tied to the generation of the invoices (as with Freeagent), so the process becomes part of the invoice process.

Send a reminder as payment becomes due
As you (or your accounts system) sees that invoices are becoming due in the next few days, a gentle email to the customer is a good idea to remind them that payment is due.   Whilst the method of payment should already be on your invoice, reminding them of the ways to pay (for instance your bank account details) should be included in the reminder email.  Some accounts systems (such as Sage or Freeagent) allow automatic reminders to be sent out.

Send another reminder when payment late
As soon as a payment is late, its time to send out another email with another reminder.  For this reminder, the wording should be stronger, stating that the payment “IS LATE” – again with the methods of payment.

Phone them
Reminder emails, letters or faxes are easily ignored.   If the debt or delay is getting more serious, a call to the accounts department of the customer is more likely to result in quick payment.  Of course, accounts payable teams of big companies are used to being chased for payments so will have a range of excuses at hand (“its just missed our payment run”, “it has to be signed off by a manager who is out until…”, etc).  Even so, try and get a committed action or payment date from them.

Go to the manager
If the accounts department of the customer is not moving things forward, don’t be afraid to contact the person who commissioned the work or even better, their boss.  Again, whilst an email may work, a phone call is even better.

Put them on hold
At some point, if payment is being held up without a valid reason, you may be tempted to put the customer on hold.   A quick email with a subject heading of “YOUR ON STOP BECAUSE OF OVERDUE INVOICES” detailing the invoices outstanding can spur companies into action.  However, this tactic only works where the customer needs more attention (more work, ongoing projects or support).  The flip side is that it can be a fairly harsh tactic to use and could effect future work coming your way.

Distance yourself from chasing
A good technique is to distance yourself from all the chasing for payment.  Even if you are a one man band, sending the chase email from “The Accounts Department” (with an accounts@… Email address) of your small company means you remain the good guy, whilst its your nasty accounts team who are being the ones chasing the payment (even though its you under a different email address).   If things get held up for a really long time with no way forward, you can distance yourself even further by employing the services of a debt chasing company, but be prepared to pay either £200 or 25% of the chased amount (whichever is the greater) for such a service.

Change Terms for future invoices
Where you have a customer who is a late payer on a regular basis, one thing to consider is to change the payment terms of future invoices.   If they always pay 10 days after your 30 day invoice terms, changing their specific terms to 20 days means they may start paying on time.  You will need to inform them that you are changing their terms before you implement such a change, and depending on your accounts system, having different customers on different terms may be a lot of administration.

Firm but fair Terms
Of course, it always helps to have Terms of Service which are firm, but fair from the outset.   As an example, in the Terms of my own company, I have both late payment fees and interest on late payments clearly defined.  

VAT on cash
Regardless of the method or chain of events that you follow, it is worth checking with your accountant or accounts system that VAT and TAX is paid on cash receipt rather than on invoice.   Otherwise, you will be repaying VAT on payments that you have yet to receive.   In the Freeagent accounts system that I use, this is a simple configuration switch on when to pay TAX.