Why late payments are such an issue.
This week, we're cross-posting from our sister project, Leapers, on the topic of late payments, and why they're more than just a problem for your bank balance.
This edition was originally posted on Leapers - our sister project which focuses on researching and supporting the mental health of freelancers. Many of the resources in our library are powered by Leapers, and you can subscribe to their substack too - if you’re keen to deep dive in to topics related to wellbeing.
Whether you're new to freelancing, or have been doing it for a while - you will have either experienced or heard about the issue of late payments to small businesses.
In the UK, over half of invoices from small businesses are paid late. (The actual numbers are probably higher, because there's no official record of all small business invoices and payments, but this data is from the FSB).
And on average, late invoices are paid around 21 days late. (Again, there's no decent data on this. These figures are extracted from various sources, including platforms like Xero and FreeAgent, and bodies working with the self-employed like IPSE, and our own data.)
But why do we, Leapers, a project that focuses on mental health, write so frequently about late payment?
Surely, it's not a mental health issue, is it?
In this email, we'll explore why late payments are, unfortunately, a mental health issue, what you can do to avoid facing issues yourself, and why clients should be paying on time.
Why is late payment such an issue?
Over the past few years, the UK has seen around 300k business closures annually, or around 1,000 a day. Of this, some sources suggest 65% blame struggling due to poor cashflow.
Cashflow is money coming in and going out of the business.
In theory, for every project or product you sell, you should get paid.
Let's say you do £1000 of work, deliver it to your client.
It's likely that you've incurred some costs in creating that work.
Perhaps you have materials to product a physical object, maybe there's software costs for the tools you use, the cost of your electricity and internet connection at home to run your laptop, the travel costs visiting your client or working on site. Sometimes you'll need to be paying insurance fees (professional indemnity, or public liability for example). Many freelancers use their own equipment to deliver work (cameras, lighting, all which has a sunk investment), rent out studio spaces, or even hire collaborators to complete and deliver the project.
And of course there's your time - the main cost of most freelance work.
So, you've been asked to deliver some work, you deliver in both your time and expertise and the cost of delivering the project. You're out of pocket. You've done work, and you're not, technically speaking, at a financial loss - you're down the value of the work and the cost of producing the work.
Then your client receives your invoice, and most likely, your contract terms will state "Due before 30 days" or similar.
Not only have you incurred a loss to produce the work, you're also giving them an interest free credit arrangement for 30 days before they have to pay you.
You've been working for (let's say) a month, and then they get another month before you see any income.
Meanwhile, your collaborators are also invoicing you, your landlord is sending your rent notice, your utility company sends you your electricity bill, your internet company sends you a bill, your software license subscription renews, you continue to work for the next client, travelling and incurring further costs.
In many ways, you're two months out of pocket now - a month during the work, a month to wait to get paid.
And because you're a good freelancer, you're paying your collaborators immediately.
You're now very literally in debt, having spent money you are waiting on.
And then comes day 30. Day 31. Day 32.
No payment has hit your account.
You send an email to the client checking if there was an issue.
Day 33. Day 34. No reply.
Another email. Now you're incurring further costs.
You're spending a few hours chasing, emailing, calling.
Day 35, 36, 37...
Another email, another call. A desperate post on a community asking what you should do.
Some googling for advice. A call with a friend.
A feeling you've done something wrong.
Another payment comes out of your business account.
And then you need to make a trip to a client who is a few hours away next month.
The cost of trains are a joke. But you have to pay that now, to get the cheaper rate.
You pay up front, and your card gets declined - low funds.
You pop it on your credit card. It'll be fine - you can pay it off when the invoice gets paid.
Day 38, 39, 40. Only ten days overdue, but maybe 60 days since you were even doing this work.
Are they delaying because they work wasn't good enough?
Day 41, 42, 43. Finally you hear from the late-paying client.
The accounts team explain their waiting on payment from their client. It's probably going to be resolved next week, and they'll hopefully get it on the next payment run at the end of the month.
Day 45, 46, 47, 48, 49... 50 - we're 20 days overdue. 21 days - the average delay most small businesses face.
You pick up the phone to call to ask if you can get paid immediately, and hesitate.
It's only £1000, you think. Am I making a fuss out of nothing?
What if they think i'm being difficult?
What if they don't work with me again?
But it's only £1000, surely they can afford to pay that?
Day 60. You've been emailing most days.
You've racked up another 6 hours of chasing and worrying.
And more funds leaving your bank account.
Maybe I should just leave it?
It's really causing me stress - not only the chasing, but I hate confrontation, I know it's not my client's fault, they're waiting to be paid too, and it's not my direct client's fault, he's said he can't do anything about it - it's with accounts. But also, now I'm paying interest on my credit card, and I've had to turn down another piece of work because I can't afford to pay the deposit to hire equipment for the shoot, nor travel to the new client's location.
I wish this was an uncommon story.
I wish I didn't see a post every single day about freelancers waiting on late payments.
And the example above was just £1000 and 30 days overdue.
Last week, I saw a post from someone who had been chasing a late payment for over 6 months.
Just before Christmas, I shared my own experiences of waiting on £10,000.
The average owed to small businesses at any time here is over £22,000.
Many businesses are waiting on more.
And we haven't even reached the conclusion of the story.
Many freelancers are forced to escalate the situation - asking for late payment fees and debt recovery fees (as is our right under UK law), and even end up having to speak to lawyers (more fees) to write formal demands and letters, or even the cost of going to small claims court to force payment.
That's right, freelancers end up paying money to get the money which is already owed to them.
So, you can see how cashflow is a major part of why late payments are such a problem.
Unfortunately, much of the time, it's a small business invoicing a larger business - and often very large businesses, who absolutely have no excuse for paying late. They have streamlined payment processes, they have dedicated people for receiving, managing and approving invoices.
They are not in debt because their internal bill came through, they are paying their employees on time every month (can you imagine the uproar there would be if employees didn't get their salary because the company "is waiting for payment from their client"?), but small suppliers seem to somehow fall outside of the process.
But often even the "waiting our our client to pay" excuse isn't used. There's just no reason, often late payments are combined with ghosting - so our plucky freelancers is not only out of pocket, but also out of explanations - having no idea if they're even going to see the money, yet alone when.
The issue is so common, there are laws in place to reduce it happening - the Late Payments of Debt (Commercial) Act, and a body called the Office of the Small Business Commissioner, who's primary role is tackling late payments of small companies from larger companies and do brilliant work in supporting small businesses taking action against late payers.
Anecdotally (as I say, because we don't have good holistic data), the likelihood of having a client who doesn't pay on time is a "when", not "if". It's going to happen at some point in your freelancing career.
There are some payment solutions and platforms which try and reduce the impact of the issue, for example, YunoJuno, a major freelancing platform will pay it's freelancers within 14 days of submitting an invoice, regardless of whether the end client has paid - but this requires your client to be signed up to that process.
There are other platforms which allow you to invoice via them, and they'll pay you immediately, but again, your client has to approve working via that platform, or often you'll be paying a surcharge on your invoice. Again, you're paying a penalty to get paid on time.
Some freelancers even offer discounts on timely payments - again, the freelancer losing out financially for clients doing the bare minimum - paying on time as they agreed to under contract.
In many ways, these solutions 'mask' the issue. They're a sticking plaster on top of the real issue - clients not paying on time. And let's not forget two important things:
a) 30 day terms are common, but not the always the case - many businesses enforce 60 day terms or longer. Some large businesses have had 120 day terms, despite the EU and UK lawmakers pushing for restriction upon those terms, they're still legally allowed.
b) 30 days is not a 'due date', it's the really the overdue-date - the last day the invoice should be paid before penalties are due. Clients could, if they wanted, pay you immediately. So an invoice being paid 1 day late isn't really 1 day late, it's 31 days after the invoice was submitted.
It's worth understanding where the 30 days thing comes from.
If you're old enough (like me) to remember the world before the internet, we used to send letters.
Sometimes by horseback. But even after the invention of the car, invoices still used to be sent, most often, by post.
30 days was generally to give enough time for:
The original invoice to be received via post
For the invoice to be read, approved, entered in to a ledger of some sort
For a payment request to be made to a bank, or a cheque to be signed
For the bank to transfer and clear the funds (which could take a number of days)
And for the monies to be received by your bank
This whole process could take 30 days, because it was all paper, pens, post and pigeons (maybe).
But today - with automation, digital invoicing, same day bank transfers, rapid accounting systems, email, etc - invoices can be seen, reviewed, approved and paid within less an hour. I know this for a fact - as I have literally paid over 30 invoices within an hour, when I work with my collaborators. Sometimes it takes a little longer if I haven't seen the email yet. 24, 48, even perhaps just over the weekend. But I know that it does not take 30 days to pay an invoice.
Yet, we continue to use the nominal amount as a 'fair' amount of time to pay someone.
Well, freelancers do.
Most other businesses don't.
You don't get 30 days to pay for your meal at Nandos - you pay before your food arrives.
You don't get 30 day to pay for your internet bill with Virgin Media, or your Mortgage account with Santander.
You don't get 30 days to pay for your train ticket with South West Trains - you have to pay a month in advance to afford a ticket.
Yet, I know freelancers who have worked for these businesses on 30+ day terms.
Salaried employees don't have to wait this long either. They get paid at the end of the month, every month, on the same day, after doing a month of work. Heck, they even get paid if they were sick, slacked off, or had a holiday.
So why do small businesses have to offer up 30 days of interest free credit to larger businesses with deeper pockets?
(I'm not sure I have an answer.)
So issue number one - cashflow.
You get paid late, it causes financial issues, because you have bills to pay too.
And in the worst case scenarios, that debt costs you more, because you have to pay fines, interest - or worst, default on debts, and find yourself in a bad place.
Issue number two - confidence.
We'll cover that in the next email over on the Leapers substack - make sure you sign up for more:
»
Coming Soon:
» “Making Tax Digital” is coming soon, if you’re not aware of “MTD”, you’ll need to be pretty soon, especially if you’re still using spreadsheets to manage your accounts. We’ll be covering this in an upcoming edition.
If you’ve got questions, thoughts or comments, drop us a note, we’ll include them in the next focused guide.
Recently seen:
» A new Small Business Commissioner has been appointed - Emma Jones of Enterprise Nation - which feels like a really smart and genuine commitment to the small business cause. Best of luck in the new role Emma.
» Malt have just published a very handy calculator to help you understand the differences between Sole Trader and Limited Company. Worth a look, if you’re still unsure on your approach.
That’s all from me this week.
✌️ mk