By Ed Molyneux, CEO, FreeAgent
Peterborough may be famous for a lot of things – the Nene Valley Railway, broadcaster Jake Humphreys, the burial site of Catherine of Aragon. But there is one honour to which the English town would likely not want to lay claim. Peterborough is the late-payment capital of the UK, with 68% of freelancers and micro-businesses there reporting their invoices are paid late by clients.
The situation is not much better nationwide. According to an analysis of hundreds of thousands of invoices that we carried out at FreeAgent, just 52% of invoices sent last year across the country were paid on time or within three days of their payment deadline.
Late payment may not be a crime, but, as far as I’m concerned, it is criminal. In this economy, we are all familiar with the sound of a supply chain going “crunch”. But keeping small suppliers, in particular, waiting for the money they deserve places them in a particularly awkward position.
Freelancers and micro-businesses are growing in number and in capability. There are currently more than five million of these businesses across the UK and their ranks have grown from 12% of the labour force in 2001 to 15.1% in 2017, according to ONS. And, with a growing skillset and a new micro-agency approach being offered, many are becoming indispensable partners to larger businesses.
But small entities are reluctant to chase their payment. Many of them fear that actually sitting up and asking for what is rightfully theirs – recompense for services rendered – will be perceived as rudeness, and that could threaten the chance of future contracts. And late payments are a scourge for which freelancers are unlikely to seek recourse in the courts. This fear places the new army of micro-businesses under stress and even at risk of hardship.
The problem is not just theirs; it’s yours, too. Because every micro-business that goes out of business means a valuable supplier lost. Every freelancer too timid to speak up is one whose daily financial anxiety is affecting their work output. Every late payment eats away at these foot soldiers’ readiness to work with you next time around.
If a big business’ cash flow is squeezed, imagine how a small one’s feels. According to supply chain finance provider Crossflow Payments, an estimated £266 billion of SME turnover is locked up in late payments.
There is, then, a Buddhist word for the approach your company should bring to freelance payments – “karma”. But not merely for the spiritual circle – paying suppliers on time also has tangible benefits for a buyer. Getting that money out the door and off the books as soon as possible is a good tactic for anyone who wants to budget effectively and not carry any liabilities on the balance sheet.
Our research at FreeAgent found some of these late payments go way beyond a week or two, with some taking months to settle invoices, or even not paying at all.
Twenty-six percent of UK micro-businesses said that the longest they have had to wait to get paid by a client was three to six months, while 10% said they have had a client who has never paid them at all.
Seventy percent of respondents felt business owners should be able to secure compensation from late-paying clients, and some 59% of respondents felt that the government should implement an official code of conduct for companies to adhere to with regard to paying clients.
Of course, the UK government has now recruited a Small Business Commissioner to help resolve late payment disputes and provide guidance, whilst new legislation was also passed in 2017 forcing big businesses to make public reports on their payments to small businesses.
But, while these changes may be a step in the right direction, the toxic culture of late payments will take a lot more than a little legislation to fix. It is reckoned most small suppliers don’t even know the new avenues available to them.
So what can be done? I always give freelancers and micro-suppliers the same advice – send invoices with clear payment terms, easy payment methods and a detailed cost breakdown; abandon the idea that seeking your money is “rude”; have a pre-prepared script for doing so; hand off your follow-ups to email scripts and always send invoices in timely fashion.
But the best practice goes beyond this. When we crunched the data of payment waits experienced by our 50,000 customers, we saw that the key factor to getting paid quickly is recency. Whilst most suppliers tend to wait around seven days after project completion before sending their invoice, those who get paid quickest actually invoice their client immediately after.
It is heartening to know that so many large business customers are not choosing to delay payment out of spite or strategy but, rather, because – once a project is out of sight – it often also goes out of mind.
When the ink is still drying on work supplied, it is still a hot topic for supplier and buyer alike.
It’s called “recency bias”. In science, psychologists have found that our brains tend to evaluate situations based on events that happened recently over those that happened in the past. In business, the client might assign more importance to your invoice because they just saw the results of the work. Good buyers want to wrap up and move on, not leave invoices hanging on the books for their finance director to contend with next month.
For buyers, there is actually nowhere to hide. These days, smart freelancers can take advantage of data analytics which can show them the likelihood a prospect will pay late before they even begin a project. In the future, suppliers may never even have to cross the frontier of “rudeness”, they may simply opt not to work with troublesome clients.
So, don’t be late, be a good customer – be fashionably early.