In the short term, unpaid invoices can create a cash flow bottleneck. In the longer term it costs time and money to chase late payments, while your company’s credit rating can be harmed if you’re forced to take out unexpected loans. Sparqa Legal offers guidance on how to improve your processes to better deal with unpaid invoices.
How to crack down on late payments
While the government is consulting on measures to strengthen protections for SMEs against late payments, your business can take the following steps now to chase payments and to crack down on persistent late payers:
- Set up a system to record what you are owed.
- Send prompt and regular invoices.
- Consider requiring an upfront deposit from customers or adapting your pricing model (eg by providing your services on a retainer).
- Consider offering incentives for prompt payment (eg discounts) or penalties for late payment (eg interest).
- Check your client’s financial health and payment practices to allow you to tailor your processes to the specific risk of non-payment.
- Look out for warning signs that your clients might be in financial difficulties (eg they’re making increasingly late payments).
Chasing unpaid invoices
Once an invoice has gone unpaid there are several possible next steps, including:
1. Make immediate contact with your customer to find out why there’s been a delay
A time frame for payment should be agreed and followed up with chasing letters. Sparqa Legal provides templates for these along with a debt collection timeline.
2. Find out whether you’re entitled to charge interest
You can normally charge interest on late payments, either if your contract says you can or if your client is another business.
3. Consider escalating your debt recovery by taking more formal action
You might want to consider taking more formal action, eg instructing a debt collector or sending a statutory demand. As a final resort you could also consider taking your client to court.
Remember that chasing debts can cost your business time and money, while aggressive debt recovery can damage your business relationships. Sometimes it’s more prudent for a business to cut its losses and write off the debt.
Helen Turnbull is Head of Strategic Development for the Marketplace at FromCounsel, the specialist corporate legal resource trusted by top global law firms and FTSE 100 companies. Before joining FromCounsel in 2021, Helen was Head of Content at Sparqa Legal. Having previously spent 12 years practising as a commercial and property law barrister, Helen regularly contributes her expertise to Sparqa’s blog.