Recent research has found that the UK has the highest proportion of overdue B2B invoices in Western Europe at 42%, with the value of unpaid invoices sitting at a staggering £44.6 billion.
This is especially bad news for SMEs. Of course, all commercial businesses rely on a balance of incoming and outgoing payments for cash flow, but a business with a modest turnaround is often particularly vulnerable to the negative impacts of late payments and can quickly slip from a healthy balance to financial hardship when invoices are ignored.
To help you navigate the pitfalls of late payments, read Rocket Lawyer’s guide on Debt recovery.
Reducing late payments
The most effective way to reduce the amount of time you spend on chasing outstanding invoices is to make it as easy as possible for your client to pay up. This means issuing invoices that are well formatted and correct, so make sure they’re free from mistakes. Use an invoice checklist – what it should cover:
- The word ‘Invoice’
- A unique invoice number
- Your company name and address
- Company name and address of your customer
- Summary description of product or service delivered
- Date of the invoice
- Cost breakdown of individual products/services delivered
- VAT (if you are VAT registered)
- Total amount due
- Payment due date and other payment terms (incl. late payment fees/interest)
- Purchase order number (if relevant)
- How to pay, along with bank or other payment details
Before following up on a late payment
If a client does fall behind with a payment, take a moment to consider your approach.
Be fair – Bear in mind your history and ongoing relationship with the customer. Have you worked with them for a while, and are they typically a reliable business partner? Before you start chasing invoices or get worked up, find out the reason why they haven’t paid you on time.
Check for errors – Also always double-check your invoice to make sure that the account information, payment amount and customer’s details are in order.
Be diligent – Make a note of what has been agreed and any correspondence with the client, then send them a copy and offer them a chance to add any details or give their version of events.
Chasing a late payment
Step 1: A friendly reminder
Send the client a friendly reminder two days after the payment was due.
Step 2: A second reminder
Email again seven days after the first reminder was sent, asking why the invoice hasn’t been paid.
Step 3: A friendly call to the client
Call 24 hours after your second email chaser.
Step 4: A second phone call
Call again seven days after the first call. Try to remain calm and reasonable at all points of contact.
Step 5: A debt recovery letter
Use a debt recovery letter when you want to follow up after an invoice has been sent and the payment terms have expired or after 28 days have passed and the debt remains outstanding.
Step 6: Second formal letter or solicitor’s letter
If the debt remains outstanding after the first letter you should send the Second payment reminder letter when you think it’s reasonable, considering the number of days that you have given the debtor in the first letter to repay the debt.
Step 7: Letter before action
If this fails to have the desired effect, you may want to consider a Letter before action to indicate that you are prepared to commence legal proceedings for collection and enforcement of the debt.
Step 8: Debt recovery action
At this point, if your client is still refusing or unable to pay the invoice, you may have to involve a third party.
If you decide to go ahead and take action, you can either issue a claim online or use hard-copy forms. For further information read Issuing a money claim.
Alternatively, if the customer accepts that money is owed but disputes the amount due, you may want to consider mediation which can help the parties arrive at a compromise.
Rocket Lawyer’s soclitors can support you every step of the way. Contact us if you would like assistance in your debt recovery process.
Ask a lawyer if you have any questions about debt recover.
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