Chasing Unpaid Invoices: The Ultimate Guide for Freelancers

6 months ago
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If you’re a freelancer you’ll understand how frustrating it can be when your client does not pay their invoice on time (or at all). So if this does happen, what can you do about it? And how can you avoid spending thousands of pounds worth of legal fees to get your payment?

In this article we explain the rules and regulations surrounding unpaid invoices, detailing how long a company has to pay an invoice, whether or not you can apply late fees to an overdue invoice and how to decide when it’s time to go legal. We also take you through some of the most important steps in chasing overdue invoices and provide up-to-date statistics on how much of an issue unpaid invoices are in 2020. 

Unpaid Invoice Statistics: How Big is the Problem? 

In this section we take a look at some of the latest Unpaid Invoice Statistics and Google search data to discover how common overdue payments are, how much they cost small businesses and more. 

Bacs Payment Schemes Limited (Bacs) provides the electronic system that’s used for making direct payments from one bank account to another in the UK (including Direct Debit, Bacs Direct Credit, etc). They found that:

  • It costs an average of £9,000 for a small business to recover their overdue payments.
  • Over a third of small to medium sized enterprises (SMEs) are having to wait two months longer than their agreed terms to be paid. 
  • ​78% of SMEs who are owed payments are waiting at least a month beyond agreed terms to be paid. 

The freelancer platform YunoJuno recently conducted a study to investigate how many freelancers in the UK have been affected by overdue payments, the results were as follows: 

  • 55% of freelancers have done work they’ve not been paid for. 
  • 1 in every 4 freelancers surveyed admitted to continuing to work for clients even when their invoices were drastically overdue. 
  • Over half of UK freelancers don’t know their rights when it comes to clients owing them money. 

When do we worry about unpaid invoices? 

Many clients, customers and companies in the UK fall behind on payments all year round, but at what time of year do businesses start searching for how to deal with overdue payments? In this section we take a look at Google search data to discover what time of year people start looking into what they can do about unpaid invoices. 

  • Data obtained from Google Trends has shown that searches for ‘unpaid invoices’ tend to peak towards the end of March. 
Chasing Unpaid Invoices - What time of day people search for 'unpaid invoices'
  • Peaks for this search term also occur at the end of June and September as well as the beginning of December. 

What impact do Unpaid Invoices have on small businesses and freelancers?

Financial Technology company Tide has conducted research into the impact that unpaid invoices can have on small-to-medium enterprises (SMEs). They found that:

  • The average SME is owed £8,500 at any given time.
  • Sole traders are owed an average of just under £1,000.
  • Companies with 10 to 50 employees are owed an average of £13,000.

As well as costing small businesses money, chasing up unpaid invoices also costs a lot of time. 

  • The study revealed that the average SME spends an hour and a half every day chasing up unpaid invoices. 
  • Businesses in London appear to be hit hardest by overdue payments, as they typically spend over 2 hours a day chasing them up. 

How long does a company have to pay an invoice legally?

HMRC state that unless other payment arrangements have been made, your client must pay you within 30 days of receiving an invoice. This means that the client has 30 calendar days (not working days) from the day they receive your invoice to pay you the amount they owe. 

If the business does not pay you on time, you can then take action using a variety of options available to you. These include:

  • Sending a friendly reminder 
  • Issuing a Letter Before Action
  • Taking them to the Small Claims Court
  • Making a Statutory Payment Demand
  • Charging interest on the amount that you are owed

In the following sections, we provide a step by step guide on how to go about each of the above options to ensure that you know your rights when it comes to Unpaid Invoices. 

How to chase an overdue invoice 

Friendly reminder 

If a client has not paid their invoice within the agreed 30 day period, your first step should be to issue a friendly email reminder to your contact at the company. Their late payment could be a genuine accident or they could have simply forgotten to pay the invoice. At this stage you could also ask them for the reason for the delay to make sure you’re kept in the loop if they are experiencing any financial difficulties. At this stage, it’s likely that you will receive an apology alongside the money they owe. 

If you still don’t receive payment, try emailing again or getting in contact with another person at the firm who may be able to help. A phone call can sometimes be more effective if your emails are going unanswered. 

Letter before action  

If reasonable time has passed since your friendly reminders and the company still haven’t settled their invoice, you may wish to send what’s called a ‘Letter before action’. This should be a brief, straight forward letter comprising of the following: 

  • What work has been done (dates and invoice reference)
  • How much they owe 
  • How long they have owed the money 
  • Next steps if they don’t pay (such as taking them to court)
  • Your payment details 
  • The deadline for the payment 

Small Claims Court

If you still do not receive payment after the timescale stated in your letter, you may choose to take the company to the Small Claims Court. If you do decide to take them to court, it’s wise to look into how much this would cost and work out whether or not it would be worth it for the amount that you are owed. 

In the UK, you may use the small claims court to chase payment of debts that come to a total of:

  • Less than £10,000 in England and Wales
  • Less than £5,000 in Scotland
  • Less than £3,000 in Northern Ireland

It’s not necessary to get a solicitor at this stage, as you can register your claim yourself via the government’s online form

It’s important to note that taking the company to court will not guarantee your money back, you will only get the value of the unpaid interest back if you win the case. 

Statutory Demand 

An alternative option to taking the company to court is to make a Statutory Payment Demand. This is a lower cost option, however it can only be used in instances where more that £750 is owed and the amount owed is also undisputed. You must also make sure that the debt is no more than 6 years old, as beyond this point it’s unlikely that you’ll be able to make the statutory demand. 

To make a statutory demand for the debt of an unpaid invoice, simply fill in a Statutory Payment Demand form and deliver it to the company that owes you money. To find out which form you need for your circumstances, see the Statutory Demands Forms page on the government website. 

Do I need to go legal?

This is entirely up to you. You have no legal obligation to take a company to court or issue a statutory demand over an unpaid invoice.  

How to chase an overdue invoice flowchart

Can you apply late fees to an overdue invoice?

You have the right to charge interest for late payment, This doesn’t mean that you have to charge interest on late payments, but you do have the option to do this by law. According to the government’s article on Charging Interest and Debt Recovery on Late Commercial Payments, the type of interest you can charge in this scenario is called ‘statutory interest’. 

This is 8% plus the Bank of England base rate for business to business transactions. If you have stated a different interest rate in your contract you will not be able to claim statutory interest. What’s more, if your contract is with a public authority you will not be able to use a lower interest rate. 

If you choose to charge a company interest on the money they owe you, make sure you send them a new invoice that details this. 

How to make sure clients pay you on time

Unfortunately there’s no secret or hard and fast rule that can guarantee that your clients will pay you on time. But there are a range of things you can do that can help to increase your chances of being paid on time. 

  1. Do your research – Before you agree to work with a company, dig into their background to see if they pay their freelancers on time. This may be easier said than done, but there are a variety of ways of assessing how likely a business is to keep up to date with their payments. 
  • Check to see if the company is struggling financially. 
  • Have a look on company review sites such as glassdoor.co.uk to see what their employees have to say about them. Look out for warning signs such as employees commenting on reductions in perks, staffing issues, etc which could indicate that the company is struggling financially.
  • Check the government’s page to see if the company has received a Winding up Petition (final warning to settle debts before liquidation), or who are in provisional liquidation.    
  • Do a credit check using a site such as creditsafe.com to find out more information about the financial state at which a company is in. 
  • Find out what they’re like to work with.
  • Have a look online for reviews from contractors and freelancers who have worked with the company in the past in order to discover whether or not they tend to pay on time. 

2. Clearly state the payment terms in your terms of business and make sure that the company is fully aware of these terms. 

3. Discontinue the work you’re doing for the company if they continue to fail to pay on time. 

Unfortunately, due to the contractual nature of this issue, there isn’t a lot you can do when a company fails to pay their invoices. However, things are starting to look up for Freelancers and Small businesses, as the government has recently proposed new changes to the role of the Office of the Small Business Commissioner. These changes should enable the Commissioner to hold large businesses more accountable for making late payments. 

We hope this article has provided you with a useful guide on how you can prevent your business from being subject to late payments and unpaid invoices and what you can do if you find yourself in this situation.  

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