Tips for Managing Debtors When You’re Self-Employed
You’ve poured passion, time and money into fulfilling a contract, have agreed on payment terms and invoiced your customer — and then nothing. Days turn into weeks, and you still haven’t received payment.
For single proprietorships and small start-up businesses, uncollected invoices can sink your business. Suddenly, you’re cash flow negative. Income you needed to cover expenses and pay vendors dries up. Without the safety nets larger companies enjoy, small businesses often face bankruptcy when a large client refuses to pay.
Wondering how to tip the balance of power in your favour? Try these strategies to get paid quickly and avoid non-payment.
Send a collection request right away
It is absolutely crucial for business owners to follow up on unpaid invoices quickly, just a few days after the payment date is missed.
Contact the debtor by phone to confirm they received your invoice and remind them that it’s past due. In many cases, your client has simply neglected to review their accounts payable and is behind with their bookkeeping. Agree on a new payment date and follow up again if it is missed.
It is also possible that your customer is struggling with financial difficulties. If so, be reasonable and suggest a payment plan. It is better to collect instalments than to receive no payment at all.
Be persistent and firm, but always polite. Harassment and escalating threats will often get you nowhere with no payment from the debtor.
Remind your debtor that late payments come with a cost
In many countries, late payments often accrue penalties that add to the debt the longer it remains unpaid.
In the UK, for example, businesses can claim interest and debt recovery costs if a client is late with payment. The Late Payment of Commercial Debts Act considers a payment late 30 days after the delivery of goods or services. After that point, interest is set at the Bank of England’s base rate, plus 8%.
Consider including a late payment charge in your terms and if your debtor won’t respond to your reminders, send them a “statement of account” that includes:
- the date of the unpaid invoice
- a description of goods or services provided for which you are awaiting payment
- the total amount due, including applicable late payment charges
Proceed with legal action
Have 30 days passed and you’re still getting nowhere with your unpaid invoice? Sometimes, all it takes to motivate a reluctant debtor is an official letter from a lawyer or debt collection service.
It’s important to note that in some cases (for example, the debtor has declared bankruptcy), it makes more sense to write off unpaid invoices as “bad debts” and absorb the loss.
When it comes to dealing with debtors, the key is to respond quickly to non-payment and follow up consistently until you’re paid. It’s also wise to consult your accountant or a trusted business advisor to tailor your strategy to protect your business.