Dealing with late payments and overdue invoices is the worst thing about working independently. If you’re a freelancer, or you run a small business, you will understand the misery of watching invoices go more and more overdue as you scrape together cash for your mortgage.
Often, payment problems are minor and will sort themselves out given a couple of weeks. But handling persistent non-payers, or stubbornly overdue invoices, is a skill that I’ve developed through painful experience.
Step #1: Be Clear
The best way to get invoices paid on time is to be absolutely clear about the due date:
- Have a contract — always — and fix the payment term
- Mention the date on your invoice
- Remind them politely a few days before it’s due.
Aim to negotiate payment terms. Have your ideal in mind, but avoid a situation where one party is imposing unwanted terms on the other.
I also find it helpful to have a discussion about price and payment very early on when a new client comes to me. That way, you’re both on the same page before you get too far into the negotiation.
If your preferred terms are different, but you can reach a compromise (in writing), that’s much better than one side settling for terms that they have no intention of adhering to.
You may also prefer to provide a discount for early payment. Personally, I can’t think of anything more complicated, so I don’t. If you only have one or two price-sensitive clients, you may find it’s very effective.
Step #2: Be Nice
When an invoice goes overdue, don’t take it personally. Often, it’s a mistake. In fact, I’d say that it’s always best to give clients the benefit of the doubt.
Being anxious can lead people to be rash and silly. I know; I’ve done it. But it’s important to fight the urge.
Burning bridges at an early stage of overdue payment is not a good idea. It’s much more difficult to look for new clients than it is to retain the ones you have — even if they’re slack. And a few days either way probably won’t matter if it’s not a regular thing.
Despite that, playing hardball doesn’t always work. I’ve noticed that good credit controllers kill with kindness. It’s one of the reasons that I’m comfortable using the firm that I use. They don’t send scary letters and send the bailiffs round immediately. They write impeccably polite letters — at least at the start.
Turn the situation around. I missed an important deadline when a close friend passed away. The clients that were kind during that week are the ones that I still work with. The experience was an eye-opener for me. You have no idea what’s going on in someone else’s life.
Step #3: Send Reminders
You should already be using accounting software that sends reminders for you. We use FreeAgent because it handles this reasonably well. (I switched to Xero for a year, and I found that none of its add-ons were quite as effective. Also, Xero charges extra for add-ons; email reminders are included in the FreeAgent subscription.)
You want your reminders to nag people without driving them crazy. We’ve tested different intervals, and we found that a reminder every 3-4 days works fine.
If your client has genuinely forgotten, then bugging them twice a week is plenty. If they’re being deliberately evasive, you don’t need to worry about pissing them off, so the frequency doesn’t matter.
It’s also a good idea to call your client at least once to see what’s happening. If you don’t feel comfortable doing this, find a virtual assistant, ask a friend, or see if your bookkeeper or accountant can help.
Writing a Reminder Email
Golden rule: always deal with client problems in as few words as possible.
Late payments are no exception.
Write out an email listing all the reasons that this invoice is causing you problems. Then write a second email that is 1-2 sentences long, and send the shorter version.
Your invoice reminder email should state three things:
- due date
- amount due
- payment method.
Let’s face it: if your client even reads this email, half the battle is won. So make it easy for them.
Step #4: Stop Work
If your reminders fall on deaf ears, it’s more likely that your client is stalling and your missing payment isn’t an innocent mistake.
At this point, you need to stop working.
Don’t do this right away. Your tolerance will vary, but I’d give them at least a couple of weeks (and often, longer).
At Red Robot Media, we have a policy of only having two monthly invoices open for any client at once. We also have a credit limit for each client, which is around double their usual monthly spend.
Pausing work may cost you money, but it is for your own benefit, because:
- Your client might have cashflow problems; piling more invoices up won’t help
- They’re unlikely to contact you about work because you’ll mention the money they owe
- If your first and second invoices aren’t paid, the third is not going to be paid either.
Some freelancers feel guilty about this. I get it. You don’t want to upset the person paying the bills. But are they really paying the bills? Do they care if you can’t pay your mortgage? Evidently not. You can stop being nice now.
It’s time to send them another brief email:
“I noticed that you haven’t paid in a while. I need to pause the project because I’m not sure if you want me to work on it and longer. Could you let me know?”
For extra impact, write a short letter and post it. This works well if you usually communicate online.
Stopping work offers three important benefits:
- It gives you control
- It shows the client that they will need to communicate
- If you’re owed money by a company, people that need your work will also start chasing your invoice.
Free debt collection. W00t!
Seriously, though; finance departments and CEOs are more likely to pay up when they realise their failure to pay is impacting the productivity of their own staff.
Step #5: Add Fees
Those of us in the UK have a legal right to add late fees to invoices. (This is an EU law, but since it existed in UK law before EU law, I’d expect it to exist after Brexit.)
My usual threshold is four weeks overdue. If your client is in contact, you might want to wait longer.
Remember: You can charge interest from the day your invoice went overdue, even if you don’t add it on until much later.
(Actually, you can add late fees on up to six years later — even if the invoice is already settled.)
While FreeAgent is really good for reminders, it offers no facility to add late fees or interest. If your invoice is caught up in a locked VAT period (i.e. a quarter that you’ve sent in your VAT return for already), you won’t be able to edit the text anyway.
Most invoice packages don’t calculate interest automatically, so you will need to come up with your own process. Here’s a good blog post that explains the law in the UK.
Again, don’t feel bad. The late fee is your legal right. And it’s compensation for all the time you’ve wasted so far.
Step #6: Get it Collected
If your invoice has been overdue for more than a month, alarm bells should be ringing.
Hopefully you’ve now:
- Politely enquired about the invoice
- Sent reminders
- Chased up on the phone
- Stopped work
- Added late fees and interest.
There are two options:
- Continue to withhold work, and hope the client comes round
- Take it to a collection agency.
Collection agencies are not scary. They are used to dealing with freelancer problems; they understand that you don’t want to burn bridges. But they are persistent.
Even better, they have the time and expertise to take it off your plate so that it isn’t bugging you when you’re supposed to be working.
Exhaust all other options before you go to collections; this is going to cost you a client. But if you’ve tried everything else, then you can safely assume that this isn’t a client worth retaining.
Collection proceedings aren’t a guarantee of getting paid. But sometimes, just one formal letter works wonders.
The only time I wasn’t able to collect was when a client was overseas, and I didn’t have complete contact details. Lesson learned.
Final Thought: Are You an Enabler?
If you have ongoing and repeated problems with late payments, you might need to look at your own behaviour and processes. Specifically, examine:
- Your contract; if it isn’t concise and clear, your clients will sign without reading it
- Your communication; have multiple ways to contact people; keep emails brief, use lists
- Professionalism; meet deadlines, deliver good work, and stick to the requirements.
Don’t give your clients any excuses.
Also, you need to develop your own ‘red flag’ system when taking on new work. This dramatically cuts back on clients that don’t pay.
For example, these would all set off our red flags:
- Won’t sign a contract
- Won’t pay a deposit
- Wants lots of work to be done urgently
- Is cagey about providing their surname or contact details
- Wants a large discount, or is excessively price-sensitive
- Doesn’t provide a clear brief, then complains
- Doesn’t understand what you do (e.g. expects a website designer to write blog posts)
- Makes unreasonable demands on your time
- Wants free work and favours
- Expects huge amounts of time on the phone, or wants you to visit them for no reason
- Promises “huge amounts of work in the future” (often in exchange for a discount)
- Is rude or aggressive.
In isolation, none of these things suggest that a client is not going to pay. But if you see more than one, your bat senses should be tingling.
(In any case, rude an aggressive clients should immediately get the heave-ho.)
Have the confidence to charge what you are worth, and have the focus to get paid what you’re owed at the end of it. It’s not a perfect system, but it certainly helped us.